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Item 8. Financial Statements and Supplementary Data

2021-02-24 compared with 2020-02-26 · 486 added, 444 removed, 1156 unchanged (45% of the section changed)

1 unchanged sentence

CHURCHILL DOWNS INCORPORATED

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

for the years ended December 31,

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Selling, general and administrative expense 114.8 122.0 90.6

Impairment of tangible and other intangible assets — — 21.7

Impairment of intangible assets 17.5 — —

Transaction expense, net 1.0 5.3 10.3

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Interest expense, net ( 80.0 ) ( 70.9 ) ( 40.1 )

Loss on extinguishment of debt — — ( 20.7 )

Equity in income of unconsolidated investments 27.7 50.6 29.6

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Income from continuing operations before provision for income taxes 8.0 196.4 233.9

Income tax (provision) benefit ( 56.8 ) ( 51.3 ) 19.9

Income tax benefit (provision) 5.3 ( 56.8 ) ( 51.3 )

Income from continuing operations, net of tax 13.3 139.6 182.6

(Loss) income from discontinued operations, net of tax ( 95.4 ) ( 2.4 ) 170.2

Net income 137.2 352.8 140.5

Net (loss) income ( 82.1 ) 137.2 352.8

Net loss attributable to noncontrolling interest ( 0.2 ) ( 0.3 ) —

Net income attributable to Churchill Downs Incorporated $ 137.5 $ 352.8 $ 140.5

Net (loss) income attributable to Churchill Downs Incorporated $ ( 81.9 ) $ 137.5 $ 352.8

Net income (loss) per common share data - basic:

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Discontinued operations $ ( 2.41 ) $ ( 0.06 ) $ 4.12

Net income per common share - basic $ 3.43 $ 8.54 $ 2.97

Net (loss) income per common share - basic $ ( 2.07 ) $ 3.43 $ 8.54

Net income (loss) per common share data - diluted:

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Discontinued operations $ ( 2.41 ) $ ( 0.06 ) $ 4.09

Net income per common share - diluted $ 3.38 $ 8.48 $ 2.92

Net (loss) income per common share - diluted $ ( 2.08 ) $ 3.38 $ 8.48

Weighted average shares outstanding:

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Change in pension benefits, net of tax — — ( 0.2 )

Other comprehensive income (loss) — 0.4 ( 0.1 )

Comprehensive income attributable to Churchill Downs Incorporated $ 137.5 $ 353.2 $ 140.4

Other comprehensive income — — 0.4

Comprehensive (loss) income attributable to Churchill Downs Incorporated $ ( 81.9 ) $ 137.5 $ 353.2

The accompanying notes are an integral part of the consolidated financial statements.

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Property and equipment, net

1,082.1 937.3

Investment in and advances to unconsolidated affiliates

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Dividends payable

Current liabilities of discontinued operations 124.0 —

Total current liabilities 424.2 301.2

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150.0 shares authorized;

39.7 shares issued and outstanding in 2019 and 40.4 in 2018

39.5 shares issued and outstanding in 2020 and 39.7 shares in 2019

Retained earnings

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Stock-based compensation 21.1 21.1

Adoption of ASC 606

Cash dividends ($ 0.543 per share)

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Foreign currency translation adjustment, net of $( 0.1 ) tax

Change in pension benefits, net of $( 0.1 ) tax

( 0.2 ) ( 0.2 )

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Net income 137.5 ( 0.3 ) 137.2

Contributions from noncontrolling interest 3.0 3.0

Issuance of common stock 0.2 1.9 1.9

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( 23.4 ) ( 23.4 )

Foreign currency translation, net of $( 0.1 ) tax

Change in pension benefits, net of $( 0.1 ) tax

( 0.2 ) ( 0.2 )

Balance, December 31, 2019 39.7 — 509.2 ( 0.9 ) 2.7 511.0

Net income 137.5 ( 0.3 ) 137.2

Contributions from noncontrolling interest 3.0 3.0

Net loss ( 81.9 ) ( 0.2 ) ( 82.1 )

Purchase of noncontrolling interest ( 0.5 ) ( 2.5 ) ( 3.0 )

Issuance of common stock 0.1 2.4 2.4

Repurchase of common stock ( 0.2 ) ( 4.3 ) ( 23.6 ) ( 27.9 )

Cash settlement of stock awards ( 12.7 ) ( 12.7 )

Taxes paid related to net share settlement of stock awards ( 0.1 ) ( 3.6 ) ( 15.1 ) ( 18.7 )

Issuance of restricted stock awards, net of forfeitures 0.1 — —

Stock-based compensation 23.7 23.7

Adoption of ASC 326

( 0.5 ) ( 0.5 )

Cash dividends ($ 0.622 per share)

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Cash flows from operating activities:

Net income $ 137.2 $ 352.8 $ 140.5

Adjustments to reconcile net income to net cash provided by operating activities:

Net (loss) income $ ( 82.1 ) $ 137.2 $ 352.8

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

Depreciation and amortization 92.9 96.4 63.6

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Deferred income taxes 1.1 31.5 36.5

Impairment of intangible assets 17.5 — —

Amortization of operating lease assets 5.0 4.6 —

Loss on impairment of assets — — 21.7

Loss on extinguishment of debt — — 20.7

Gain on Ocean Downs/Saratoga transaction — — ( 54.9 )

Gain on sale of Big Fish Games — — ( 219.5 )

Game software development amortization — 0.4 17.5

Other 4.5 2.8 ( 1.2 )

Changes in operating assets and liabilities, net of businesses acquired and dispositions:

Game software development — ( 0.3 ) ( 22.1 )

Income taxes ( 34.3 ) 2.5 13.8

Deferred revenue ( 8.3 ) ( 9.3 ) ( 10.3 )

Current liabilities of discontinued operations 124.0 — —

Other assets and liabilities ( 5.1 ) 12.6 5.7

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Proceeds from sale of Big Fish Games — — 970.7

Receivable from escrow — — 13.6

Other ( 5.2 ) ( 1.2 ) ( 10.3 )

5 unchanged sentences

Repurchase of common stock ( 28.4 ) ( 95.0 ) ( 531.4 )

Cash settlement of stock awards ( 12.7 ) — —

Taxes paid related to net share settlement of stock awards ( 18.7 ) ( 11.5 ) ( 15.6 )

1 unchanged sentence

Big Fish Games earnout and deferred payments — — ( 58.2 )

Call premium on 2021 Senior Notes — — ( 16.1 )

Debt issuance costs ( 2.0 ) ( 8.9 ) ( 0.8 )

Change in bank overdraft 13.4 — ( 4.4 )

Other 2.1 2.4 1.5

25 unchanged sentences

Churchill Downs Incorporated (the "Company", "we", "us", "our") is an industry-leading racing, online wagering and gaming entertainment company anchored by our iconic flagship event, the Kentucky Derby.

We own and operate Derby City Gaming, a historical racing machine ("HRM") facility in Louisville, Kentucky.

We also own and operate the largest online horse racing wagering platform in the U.S., TwinSpires.com, and we operate sports betting and iGaming through our BetAmerica platform in multiple states.

We are also a leader in brick-and-mortar casino gaming with approximately 11,000 slot machines and video lottery terminals ("VLTs") and 200 table games in eight states.

We own and operate three pari-mutuel gaming entertainment venues with approximately 3,050 historical racing machines ("HRMs") in Kentucky.

We also own and operate TwinSpires, one of the largest and most profitable online wagering platforms for horse racing, sports and iGaming in the U.S.

and we have seven retail sportsbooks.

We are also a leader in brick-and-mortar casino gaming in eight states with approximately 11,000 slot machines and video lottery terminals ("VLTs") and 200 table games.

We were organized as a Kentucky corporation in 1928, and our principal executive offices are located in Louisville, Kentucky.

During the first quarter of 2019, we realigned our operating segments to reflect the internal management reporting used by our chief operating decision maker to evaluate results of operations and to assess performance and allocate resources.

Our internal management reporting changed primarily due to the continued growth in our Churchill Downs Racetrack and Derby City Gaming business and our casino and associated racing businesses, which resulted in our chief operating decision maker's decision to realign our operating segments primarily based on the regulatory licenses governing each business.

Since each of these individual businesses operates under single or interdependent licenses, each of these businesses represents an operating segment.

As our TwinSpires business and online sports betting and iGaming businesses are managed together, these businesses represent an operating segment.

For financial reporting purposes, we aggregate our operating segments that are similar into three reportable segments as follows:

• Churchill Downs

The Churchill Downs segment includes live and historical pari-mutuel racing related revenue and expenses at Churchill Downs Racetrack and Derby City Gaming.

Churchill Downs Racetrack is the home of The Kentucky Derby and conducts live racing during the year.

Derby City Gaming is an HRM facility that operates under the Churchill Downs pari-mutuel racing license at its auxiliary training facility in Louisville, Kentucky.

Churchill Downs Racetrack and Derby City Gaming earn commissions primarily from pari-mutuel wagering on live races at Churchill Downs and on historical races at Derby City Gaming;

simulcast fees earned from other wagering sites;

admissions, personal seat licenses, sponsorships, television rights, and other miscellaneous services (collectively "racing event-related services"), as well as food and beverage services.

• Online Wagering

The Online Wagering segment includes the revenue and expenses for the TwinSpires business ("TwinSpires") and the online sports betting and iGaming business.

TwinSpires operates our online horse racing wagering business on TwinSpires.com, BetAmerica.com and other white-label platforms;

facilitates high dollar wagering by international customers ("Velocity");

and provides the Bloodstock Research Information Services ("BRIS") platform for horse racing statistical data.

Our sports betting and iGaming business operates the BetAmerica sports betting and casino iGaming platform in multiple states, including Mississippi, New Jersey, Indiana, Pennsylvania, and Arkansas.

The mobile and online BetAmerica sports betting and casino iGaming results are included in the Online Wagering segment and the retail operations are included in the Gaming segment.

The Gaming segment includes revenue and expenses for the casino properties and associated racetrack or jai alai facilities which support the casino license as applicable.

The Gaming segment has approximately 11,000 slot machines and video lottery terminals ("VLTs") and 200 table games located in eight states.

The Gaming segment revenue and expenses includes the following properties:

◦ Calder Casino and Racing ("Calder")

◦ Fair Grounds Slots, Fair Grounds Race Course, and Video Services, LLC ("VSI") (collectively, "Fair Grounds and VSI")

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

◦ Harlow’s Casino Resort and Spa ("Harlow's")

◦ Lady Luck Casino Nemacolin ("Lady Luck Nemacolin") management agreement

◦ Ocean Downs Casino and Racetrack ("Ocean Downs")

◦ Oxford Casino and Hotel ("Oxford")

◦ Presque Isle Downs and Casino ("Presque Isle")

◦ Riverwalk Casino Hotel ("Riverwalk")

The Gaming segment also includes net income for our ownership portion of the Company’s equity investments in the following:

◦ 61.3 % equity investment in Midwest Gaming Holdings, LLC ("Midwest Gaming"), the parent company of Rivers Casino Des Plaines in Des Plaines, Illinois ("Rivers Des Plaines")

◦ 50 % equity investment in Miami Valley Gaming and Racing ("MVG")

The Gaming segment generates revenue and expenses from slot machines, table games, VLTs, video poker, retail sports betting, ancillary food and beverage services, hotel services, commission on pari-mutuel wagering, racing event-related services, and / or other miscellaneous operations.

We have aggregated the following businesses as well as certain corporate operations, and other immaterial joint ventures in "All Other" to reconcile to consolidated results:

• Arlington International Racecourse ("Arlington")

• United Tote

• Oak Grove Racing and Gaming ("Oak Grove")

• Turfway Park

We conduct our business through these reportable segments and report net revenue and operating expense associated with these reportable segments in the accompanying consolidated statements of comprehensive income.

The prior year results were reclassified to conform to this presentation.

Effective January 1, 2019, the Company does not allocate corporate and other related expenses to the reportable segments in the accompanying consolidated statements of comprehensive income.

The prior year results in the accompanying consolidated statements of comprehensive income were reclassified to conform to this presentation.

Acquisitions of Presque Isle and Lady Luck Nemacolin

On January 11, 2019, we completed the acquisition of Presque Isle located in Erie, Pennsylvania from Eldorado Resorts, Inc.

("ERI") for cash consideration of $ 178.9 million (the "Presque Isle Transaction") and $ 1.6 million of working capital and other purchase price adjustments.

On March 8, 2019, the Company assumed management and acquired certain assets related to the management of Lady Luck Nemacolin in Farmington, Pennsylvania, from ERI for cash consideration of $ 100,000 (the "Lady Luck Nemacolin Transaction").

For additional information on the Presque Isle Transaction and the Lady Luck Nemacolin Transaction, refer to Note 3, Acquisitions.

Acquisition of Certain Ownership Interests of Rivers Des Plaines

On March 5, 2019, the Company completed the acquisition of certain ownership interests of Midwest Gaming, the parent company of Rivers Des Plaines to acquire approximately 42 % of Midwest Gaming from affiliates and co-investors of Clairvest Group Inc.

("Clairvest") and members of High Plaines Gaming, LLC ("High Plaines"), an affiliate of Rush Street Gaming, LLC and Casino Investors, LLC ("Casino Investors") for cash consideration of approximately $ 406.6 million and $ 3.5 million of certain transaction costs and working capital adjustments (the "Sale Transaction").

Following the closing of the Sale Transaction, the parties completed a recapitalization transaction on March 6, 2019 (the "Recapitalization"), pursuant to which Midwest Gaming used approximately $ 300.0 million in proceeds from amended and extended credit facilities to redeem, on a pro rata basis, additional Midwest Gaming units held by High Plaines and Casino Investors.

As a result of the Recapitalization, the Company's ownership of Midwest Gaming increased to 61.3 %.

High Plaines retained ownership of 36.0 % of Midwest Gaming and Casino Investors retained ownership of 2.7 % of Midwest Gaming.

Impact of the COVID-19 Global Pandemic

In March 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic.

Considerable uncertainty still surrounds the COVID-19 virus and the potential effects of COVID-19, and the extent of and effectiveness of responses taken on international, national and local levels.

Measures taken to limit the impact of COVID-19, including shelter-in-place orders, social distancing measures, travel bans and restrictions, and business and government shutdowns, have resulted and continue to result in significant negative economic impacts in the U.S.

and in relation to our business.

The long-term impact of COVID-19 on the U.S.

and world economies and continuing impact on our business remains uncertain, the duration and scope of which cannot currently be predicted.

In response to the measures taken to limit the impact of COVID-19 described above, and for the protection of our employees, customers, and communities, we temporarily suspended operations at our properties in March 2020.

In May 2020, we began to reopen our properties with patron restrictions and gaming limitations.

One property temporarily suspended operations again in July 2020 and reopened in August 2020, and three properties temporarily suspended operations again in December 2020 and reopened in January 2021.

We implemented a number of initiatives to facilitate social distancing and enhanced cleaning, such as increased frequency of cleaning and sanitizing of all high-touch surfaces, mandatory temperature checks of all guests and team members upon entry and required training for all team members on safety protocols.

Certain amenities at our properties have continued to be suspended, including food buffets and valet services, and certain restaurants and food outlets.

A summary of the temporary closures and the current restrictions at each property is provided in Part II, Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations contained within this Report.

On March 25, 2020, as a result of the temporary closures and suspended operations described above, the Company announced the temporary furlough of employees at the Company's wholly-owned and managed gaming properties and certain racing operations.

As the Company reopened these properties, certain employees have returned to work while others remain on temporary furlough due to the capacity restrictions at these properties.

The Company provided health, dental, vision and life insurance benefits to furloughed employees through July 31, 2020 and during the subsequent property closure periods.

The Company also implemented a temporary salary reduction for all remaining non-furloughed salaried employees based on a percentage that varies dependent upon the amount of each employee’s salary.

The most senior level of executive management received the largest salary decrease, based on both percentage and dollar amount.

Salaries for non-furloughed employees resumed at the annual base salary beginning with the start of the employee's first full pay period after July 31, 2020.

The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") provides an employee retention credit (“CARES Employee Retention Credit”), which is a refundable tax credit against certain employment taxes of up to $5,000 per employee for eligible employers.

The tax credit is equal to 50% of qualified wages paid to employees during a quarter, capped at $10,000 of qualified wages per employee.

The Company qualified for the tax credit and received additional tax credits for qualified wages, and the Company recorded a $ 2.7 million benefit related to the CARES Employee Retention Credit in operating expense in the accompanying consolidated statement of comprehensive (loss) income for the year ended December 31, 2020.

The CARES Act also provides for deferred payment of the employer portion of social security taxes through December 31, 2020, with 50% of the deferred amount due December 31, 2021 and the remaining 50% due December 31, 2022.

Approximately $ 5.3 million of deferred payments are recorded as liabilities within accrued expense and other current liabilities and other noncurrent liabilities in the accompanying consolidated balance sheet as of December 31, 2020.

The Company reduced planned maintenance and project capital expenditures for 2020 as a result of the temporary property and operations closures and prioritized capital investments based on the highest near-term return opportunities in order to maintain financial flexibility.

Refer to Note 12, Total Debt, for discussion of from borrowings and repayments on our revolving credit facility (the "Revolver") pursuant to the Credit Agreement, and the amendments entered into during 2020.

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

We also recognized a $ 103.2 million deferred tax liability and a corresponding increase in our investment in unconsolidated affiliates related to an entity we acquired in conjunction with our acquisition of the Clairvest ownership stake in Midwest Gaming.

For additional information on the Sale Transaction, refer to Note 14, Investments in and Advances to Unconsolidated Affiliates.

Turfway Park Acquisition

The Company completed the acquisition of Turfway Park from Jack Entertainment LLC ("JACK") and Hard Rock International (“Hard Rock”) on October 9, 2019 for total consideration of $ 46.0 million in cash ("Turfway Park Acquisition").

Turfway Park is located on 197 acres in Florence, Kentucky.

The Company has announced plans and has begun to invest up to $ 150.0 million (including the Turfway Park Acquisition total consideration of $ 46.0 million) in a state-of-the-art live and historical thoroughbred racing facility at Turfway Park.

Of the $ 46.0 million total consideration, $ 36.0 million, less $ 0.9 million of working capital and purchase price adjustments, was accounted for as a business combination.

The remaining $ 10.0 million was paid to Hard Rock for the assignment of the purchase and sale agreement rights and was accounted for separately from the business combination as an intangible asset and was amortized through expense in the fourth quarter of 2019.

Refer to Note 3, Acquisitions, for additional information on the Turfway Park Acquisition.

On January 25, 2019, the Company distributed the additional shares resulting from a previously announced three -for-one split (the "Stock Split") of the Company's common stock for shareholders of record as of January 11, 2019.

Our common stock began trading at the split-adjusted price on January 28, 2019.

All share and per-share amounts in the Company’s consolidated financial statements and related notes have been retroactively adjusted for prior periods to reflect the effects of the Stock Split.

Based on our current projected operating cash flow needs, interest and debt repayments, and revised maintenance and project capital expenditures, we believe we have adequate cash to fund our business operations, meet all of our financial commitments, and invest in our prioritized key growth capital projects for well beyond the next twelve months.

SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries.

The accompanying consolidated financial statements include the accounts of the Company and subsidiaries.

All intercompany balances and transactions have been eliminated in consolidation.

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We consolidate a VIE when we have both the power to direct the activities that most significantly impact the results of the VIE and the right to receive benefits or the obligation to absorb losses of the entity that could be potentially significant to the VIE.

WKY Development, LLC, a joint venture owned 95 % by the Company, owns Oak Grove, and is consolidated in our accompanying consolidated financial statements.

As of December 31, 2019, on a consolidated basis Oak Grove had total assets of $ 62.1 million, primarily related to property and equipment, net, and total liabilities of $ 9.3 million, primarily related to accrued expenses and other current liabilities.

Use of Estimates

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Goodwill and indefinite-lived intangible assets are required to be tested annually or more frequently if events or changes in circumstances indicate that it is more likely than not that an asset is impaired.

An entity may first assess qualitative factors to determine whether it is necessary to complete the two-step impairment test using a more likely than not criteria.

If an entity believes it is more likely than not that the fair value of a reporting unit is greater than its carrying value, including goodwill, the quantitative impairment test can be bypassed.

Alternatively, an entity has an unconditional option to bypass the qualitative assessment and proceed directly to performing the two-step quantitative impairment test.

An entity may first assess qualitative factors to determine whether it is necessary to complete the impairment test using a more likely than not criteria.

If an entity believes it is more likely than not that the fair value of a reporting unit is greater than the reporting unit's carrying value, including goodwill, the quantitative impairment test can be bypassed.

Alternatively, an entity has an unconditional option to bypass the qualitative assessment and proceed directly to performing the quantitative impairment test.

If a quantitative impairment test of goodwill is required, we generally determine the fair value under the market and income valuation approaches using inputs primarily related to discounted projected cash flows and price multiples of publicly traded comparable companies.

If a quantitative impairment test of our indefinite-lived intangible assets is required, we generally determine the fair value using the Greenfield method for gaming rights and relief-from-royalty method of the income approach for trademarks.

Qualitative factors include macroeconomic conditions, industry and market conditions, cost factors and overall financial performance, among others.

These factors require judgments and estimates, and application of alternative assumptions could produce significantly different results.

Evaluations of possible impairment utilizing the two-step approach require us to estimate, among other factors,

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

forecasts of future operating results, revenue growth, EBITDA margin, tax rates, capital expenditures, depreciation, working capital, weighted average cost of capital, long-term growth rates, risk premiums, terminal values and fair market values of our reporting units and assets.

Evaluations of possible impairment require us to estimate, among other factors, forecasts of future operating results, revenue growth, operating expense, tax rates, start-up costs, capital expenditures, depreciation, working capital, discount rates, long-term growth rates, risk premiums, royalty rates, terminal values and fair market values of our reporting units and assets.

Changes in estimates or the application of alternative assumptions could produce significantly different results.

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Property and Equipment

We review the carrying value of our property and equipment to be held and used in our operations whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable from estimated future undiscounted cash flows expected to result from its use and eventual disposition.

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

flows expected to result from the asset's use and eventual disposition.

Adverse industry or economic trends, lower projections of profitability, or a significant adverse change in legal factors or in the business climate, among other items, may be indications of potential impairment issues.

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We historically have had fewer live racing days during the first quarter of each year, and the majority of our live racing revenue occurs during the second quarter with the running of the Kentucky Oaks and Kentucky Derby.

For live races we present at our racetracks, we recognize revenue on wagers we accept from customers at our racetrack ("on-track revenue") and revenue we earn from exporting our live racing signals to other race tracks, off-track betting facilities

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

("OTBs"), and advance deposit wagering providers ("export revenue").

For simulcast races we display at our racetracks, OTBs, and Online Wagering platforms, we recognize revenue we earn from providing a wagering service to our customers on these imported live races ("import revenue").

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The revenue we recognize for on-track revenue, import revenue, and HRM revenue is the commission we are entitled to retain for providing a wagering service to our customers.

For these arrangements, we are the principal as we control the wagering service;

For these arrangements, we are the principal as we control the wagering

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

therefore, any charges, including any applicable simulcast fees, we incur for delivering the wagering service are presented as operating expenses.

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When cash is received in advance of delivering services under our contracts, we defer revenue and recognize it in accordance with our policies for that type of contract.

In situations where the timing of revenue recognition differs from

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

the timing of invoicing, we have determined our contracts do not include a significant financing component.

In situations where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts do not include a significant financing component.

The primary purpose of our invoicing terms is to allow our customers to secure the right to the specific services provided under our contracts, not to receive financing from our customers.

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The loyalty point contract liability amount is deferred and recognized as revenue when the customer redeems the points for a wagering transaction or food and beverage, and such goods or services are delivered to the customer.

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

We use estimates and judgments for financial reporting to determine our current tax liability and deferred taxes.

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Restricted Cash and Account Wagering Deposit Liabilities

Amounts included in restricted cash represent amounts due to horsemen for purses, stakes and awards that are paid in accordance with the terms of our contractual agreements or statutory requirements.

Restricted cash also includes deposits collected from our Online Wagering customers.

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

Restricted cash includes deposits collected from our Online Wagering customers.

Other amounts included in restricted cash represent amounts due to horsemen for purses, stakes and awards that are paid in accordance with the terms of our contractual agreements or statutory requirements.

Allowance for Doubtful Accounts Receivable

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments.

Upon our adoption of Accounting Standards Update ("ASU") No.

2016-13, Financial Instruments - Credit Losses ("ASC 326") on January 1, 2020, we maintain an allowance for doubtful accounts for current expected credit losses on our financial assets measured at amortized cost which are primarily included in accounts receivable, net in the accompanying consolidated balance sheets.

The Company evaluates current expected credit losses on a collective (pool) basis when similar risk characteristics exist.

Write-offs are recognized when the Company concludes that all or a portion of a financial asset is no longer collectible.

Any subsequent recovery is recognized when it occurs.

Prior to adopting ASC 326, we maintained an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments.

The allowance is maintained at a level considered appropriate based on historical experience and other factors that affect our expectation of future collectability.

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Internal Use Software

Internal use software costs for Online Wagering software is capitalized in property and equipment, net in the accompanying consolidated balance sheets, in accordance with accounting guidance governing computer software developed or obtained for internal use.

Once the software is placed in operation, we amortize the capitalized software over its estimated economic useful life, which is generally three years.

Internal use software costs for Online Wagering software are capitalized in property and equipment, net in the accompanying consolidated balance sheets, in accordance with accounting guidance governing computer software developed or obtained for internal use.

Once the software is placed in operation, we amortize the capitalized software over the software's estimated economic useful life, which is generally three years.

We capitalized internal use software of approximately $ 10.5 million in 2020, $ 9.8 million in 2019, and $ 9.7 million in 2018.

We incurred amortization expense of approximately $ 9.4 million in 2020, $ 8.8 million in 2019, and $ 7.3 million in 2018, for projects which had been placed in service.

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

Fair Value of Assets and Liabilities

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Distributions in excess of equity method income are recognized as a return of investment and recorded as investing cash inflows in the accompanying consolidated statements of cash flows.

We classify income and losses as well as gains and impairments related to our investments in unconsolidated affiliates as a component of other income (expense) in the accompanying consolidated statements of comprehensive income.

We evaluate our investments in unconsolidated affiliates for impairment whenever events or changes in circumstances indicate that the carrying value of the investment may have experienced an "other-than-temporary" decline in value.

If such conditions exist, we compare the estimated fair value of the investment to its carrying value to determine if an impairment is indicated and determine whether the impairment is "other-than-temporary" based on an assessment of all relevant factors, including consideration of our intent and ability to retain our investment until the recovery of the unrealized loss.

If such conditions exist, we compare the estimated fair value of the investment to the investment's carrying value to determine if an impairment is indicated and determine whether the impairment is "other-than-temporary" based on an assessment of all relevant factors, including consideration of our intent and ability to retain our investment until the recovery of the unrealized loss.

We estimate fair value using a discounted cash flow analysis based on estimated future results of the investee.

On January 1, 2019, the Company adopted ASU No.

2016-02, Leases, and subsequently issued additional guidance (collectively, "ASC 842") using the modified transition method.

As part of the transition to ASC 842, we elected the package of practical expedients that allowed us to not reassess:

(1) whether any expired or existing contracts are or contain leases, (2) lease classification of any expired or existing leases and (3) initial direct costs of any expired or existing leases.

Due to the adoption of ASC 842, we recognize operating lease right-of-use assets ("ROUAs") and lease liabilities for our operating leases with lease terms greater than one year.

We do not have any material finance leases or any material operating leases where we are the lessor.

Upon adopting ASC 842, we determine if an arrangement is a lease at inception.

Operating and finance leases are included in property and equipment, net;

accrued expense and other current liabilities;

and other liabilities on our consolidated balance sheets.

We generally do not separate lease and non-lease components for our lease contracts.

We do not apply the ROUA and leases liability recognition requirements to short-term leases.

Operating lease ROUAs and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date.

These leases do not provide an implicit rate, so therefore we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of future lease payments.

The operating lease ROUAs also include any lease payments made prior to commencement and exclude lease incentives and initial direct costs incurred.

The lease terms include all non-cancelable periods and may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.

Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

Debt Issuance Costs and Loan Origination Fees

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All of our casino taxes and the majority of our pari-mutuel taxes are gross receipts taxes levied on the gaming entity.

We recognize these taxes as Churchill Downs, Online Wagering, Gaming, and All Other operating expenses in our consolidated statements of comprehensive income.

In certain jurisdictions governing our pari-mutuel contracts with customers, there are specific pari-mutuel taxes that are assessed on winning wagers from our customers, which we collect and remit to the government.

These taxes are presented on a net basis.

We recognize these taxes as Churchill Downs, Online Wagering, Gaming, and All Other operating expenses in our consolidated statements of comprehensive (loss) income.

In certain jurisdictions governing our pari-

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

mutuel contracts with customers, there are specific pari-mutuel taxes that are assessed on winning wagers from our customers, which we collect and remit to the government.

These taxes are presented on a net basis.

Purse Expense

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We expense the costs of general advertising, marketing and associated promotional expenditures at the time the costs are incurred.

We incurred advertising and marketing expense of approximately $ 41.8 million in 2019, $ 28.8 million in 2018, and $ 24.8 million in 2017 in our accompanying consolidated statements of comprehensive income.

We incurred advertising and marketing expense of approximately $ 31.4 million in 2020, $ 41.8 million in 2019, and $ 28.8 million in 2018 in our accompanying consolidated statements of comprehensive (loss) income.

Stock-Based Compensation

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Common Stock Share Repurchases

From time-to-time, we repurchase shares of our common stock under share repurchase programs authorized by our Board of Directors.

From time-to-time, we repurchase shares of our common stock under share repurchase programs and privately negotiated transactions authorized by our Board of Directors.

Share repurchases constitute authorized but unissued shares under the Kentucky laws under which we are incorporated.

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In such instances, we record the cost of any further share repurchases as a reduction to retained earnings.

Due to the large number of share repurchases of our common stock over the past several years our common stock balance frequently will be zero at the end of any given reporting period.

Due to the large number of shares of our common stock repurchased over the past several years, our common stock balance frequently will be zero at the end of any given reporting period.

Refer to Note 10, Shareholders' Equity, for additional information on our share repurchases.

Recent Accounting Pronouncements - Adopted on January 1, 2020

In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU No.

2016-02, Leases, and subsequently issued additional guidance (collectively, "ASC 842"), which requires companies to generally recognize operating and financing lease liabilities and corresponding right-of-use assets ("ROUAs") on the balance sheet.

We adopted ASC 842 on January 1, 2019 using the modified transition method.

As part of the transition to ASC 842, we elected the package of practical expedients that allowed us to not reassess:

(1) whether any expired or existing contracts are or contain leases, (2) lease classification of any expired or existing leases and (3) initial direct costs of any expired or existing leases.

We recognized the cumulative effect of applying ASC 842 as an opening balance sheet adjustment at January 1, 2019.

The comparative information has not been retrospectively adjusted and continues to be reported under the accounting standards in effect for those periods.

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

The adoption of ASC 842 had no impact on our accompanying consolidated statements of comprehensive income or statements of cash flows.

Due to the adoption of ASC 842, we recognized operating lease ROUAs and lease liabilities for our operating leases with lease terms greater than one year.

We do not have any material finance leases or any material operating leases where we are the lessor.

The cumulative effects of the changes made to our accompanying consolidated balance sheets as of January 1, 2019 for the adoption of ASC 842 were as follows:

(in millions) As Reported at December 31, 2018 Adoption of ASC 842 Balance at January 1, 2019

Other current assets $ 22.4 $ ( 0.3 ) $ 22.1

Property and equipment, net 757.5 25.3 782.8

Accrued expense and other current liabilities 89.8 3.8 93.6

Other liabilities 15.7 21.5 37.2

SHAREHOLDERS' EQUITY

Retained earnings 474.2 ( 0.3 ) 473.9

Upon adopting ASC 842, we determine if an arrangement is a lease at inception.

Operating leases are included in property and equipment, net;

accrued expense and other current liabilities;

and other liabilities on our consolidated balance sheets.

We generally do not separate lease and non-lease components for our lease contracts.

We do not apply the ROUA and leases liability recognition requirements to short-term leases.

Operating lease ROUAs and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date.

As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of future lease payments.

The operating lease ROUAs also include any lease payments made prior to commencement and exclude lease incentives and initial direct costs incurred.

Our lease terms include all non-cancelable periods and may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.

Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term .

Recent Accounting Pronouncements - effective in 2020 or thereafter

In June 2016, the FASB issued ASU No.

In June 2016, the Financial Accounting Standards Board ("FASB”) issued ASU No.

2016-13, Financial Instruments - Credit Losses, which introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses.

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(1) loans, accounts receivable, trade receivables, and other financial assets measured at amortized cost, (2) loan commitments and certain other off-balance sheet credit exposures, (3) debt securities and other financial assets measured at fair value through other comprehensive income, and (4) beneficial interests in securitized financial assets.

The guidance will become effective in 2020, and is to be applied through a modified retrospective approach during the year of adoption.

The Company's implementation activities, which remain in progress, include identifying the financial assets in the scope of the new standard, developing methods to estimate current expected credit losses associated with these financial assets, and determining changes needed to control activities.

We do not expect our future adoption of such guidance to have a material impact on our results of operations, financial condition, or cash flows.

We adopted ASC 326 on January 1, 2020 using the modified retrospective approach.

We recognized the cumulative effect of applying ASC 326 as an opening balance sheet adjustment on January 1, 2020.

The comparative

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

information has not been retrospectively adjusted and continues to be reported under the accounting standards in effect for those periods.

The adoption of ASC 326 did not have a material impact on our business.

In August 2018, the FASB issued ASU No.

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The new guidance also requires an entity to expense the capitalized implementation costs of a hosting arrangement over the term of the hosting arrangement.

The guidance is effective in 2020 with early adoption permitted and may be applied prospectively or retrospectively.

As this new guidance is consistent with our current accounting policies, we do not expect our future adoption of such guidance to have a material impact on our results of operations, financial condition, or cash flows.

We adopted this guidance on January 1, 2020.

This guidance is consistent with our current accounting policies, and therefore our adoption of this guidance did not have a material impact on our business.

In January 2017, the FASB issued ASU No.

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This new guidance simplifies the accounting for goodwill impairments by removing step two from the goodwill impairment test.

Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess.

The new guidance is effective in 2020 with early adoption permitted for any

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

goodwill impairment test performed between January 1, 2017 and January 1, 2020, and is to be applied prospectively.

The new guidance will not result in a cumulative adjustment upon adoption and will only be applicable in the event a reporting unit's carrying amount exceeds its fair value when testing goodwill for impairment.

As a result, we do not expect our future adoption of such guidance to have a material impact on our results of operations, financial condition, or cash flows.

On January 11, 2019, the Company completed the Presque Isle Transaction for a cash purchase price of $ 178.9 million and $ 1.6 million of working capital and other purchase price adjustments.

The following table summarizes the fair values of the assets acquired and liabilities assumed, net of cash acquired of $ 8.4 million, at the date of the acquisition.

Instead, if the carrying amount of a reporting unit exceeds the reporting unit's fair value, an impairment loss shall be recognized in an amount equal to that excess.

We adopted this guidance on January 1, 2020.

The new guidance did not result in a cumulative adjustment upon adoption and there was no impairment recognized under the new guidance for the year ended December 31, 2020.

Recent Accounting Pronouncements - effective in 2021 or thereafter

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions to applying the guidance on contract modifications, hedge accounting, and other transactions, to simplify the accounting for transitioning from the London Interbank Offered Rate (LIBOR), and other interbank offered rates expected to be discontinued, to alternative reference rates.

The guidance was effective upon issuance;

if elected, it is to be applied prospectively through December 31, 2022.

We are currently evaluating the effect the adoption of this new accounting standard will have on our results of operations, financial condition, or cash flows.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC Topic 740, Income Taxes.

The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance.

This ASU is effective for public business entities for fiscal years and interim periods beginning after December 15, 2020.

The Company does not expect the adoption of this ASU to have a material impact on the Company's consolidated financial statements.

On January 11, 2019, we completed the acquisition of Presque Isle located in Erie, Pennsylvania from Eldorado Resorts, Inc.

("ERI") for cash consideration of $ 178.9 million (the "Presque Isle Transaction") and $ 1.6 million of working capital and other purchase price adjustments.

The following table summarizes the final fair values of the assets acquired and liabilities assumed, net of cash acquired of $ 8.4 million, at the date of the acquisition.

(in millions) Total

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Non-current liabilities ( 0.6 )

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

The fair value of the intangible assets consists of the following:

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Total intangible assets $ 71.2

Current assets and current liabilities were valued at the existing carrying values as these items are short term in nature and represent management's estimated fair value of the respective items at January 11, 2019.

The property and equipment acquired primarily relates to land, buildings, equipment, and furniture and fixtures.

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The fair value of the Presque Isle gaming rights was determined using the Greenfield Method, which is an income approach methodology that calculates the present value of the overall business enterprise based on a projected cash flow stream.

This method assumes that the gaming rights intangible asset provides the opportunity to develop a casino in a specified region, and that the present value of the projected cash flows are a result of the realization of advantages contained in these rights.

This method assumes that the gaming rights intangible asset provides the opportunity to develop a casino in a specified region, and that the present value of the projected cash flows is a result of the realization of advantages contained in these rights.

Under this methodology, the acquirer is expected to absorb all start-up costs, as well as incur all expenses pertaining to the acquisition and/or the creation of all tangible and intangible assets.

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The renewal of the gaming rights in Pennsylvania is subject to various legal requirements.

However, the Company's historical experience has not indicated, nor does the Company expect, any limitations regarding its ability to continue to renew its gaming rights in Pennsylvania.

However, the Company's historical experience has not indicated, nor does the Company expect any limitations regarding the Company's ability to continue to renew our gaming rights in Pennsylvania.

The trademark intangible asset was valued using the relief-from-royalty method of the income approach, which estimates the fair value of the intangible asset by discounting the fair value of the hypothetical royalty payments a market participant would be willing to pay to enjoy the benefits of the asset.

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The goodwill was assigned to the Gaming segment and is deductible for tax purposes.

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

Refer to Note 8, Asset Impairment, for information regarding intangible asset impairments recognized during the first quarter of 2020 related to the Presque Isle gaming rights and trademark.

For the period from the Presque Isle Transaction on January 11, 2019 through December 31, 2019, net revenue was $ 138.5 million and net income was not material.

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Lady Luck Nemacolin

On March 8, 2019, the Company completed the Lady Luck Nemacolin Transaction, pursuant to which the Company assumed management and acquired certain assets related to the management of Lady Luck Nemacolin from ERI for cash consideration of $ 100,000 .

The Lady Luck Nemacolin Transaction did not meet the definition of a business and therefore was accounted for as an asset acquisition.

The net assets acquired in conjunction with the Lady Luck Nemacolin Transaction were not material.

On October 9, 2019, the Company completed the Turfway Park Acquisition for total consideration of $ 46.0 million.

Of the total consideration paid, $ 36.0 million was allocated to JACK and accounted for as a business combination.

The remaining $ 10.0 million was paid to Hard Rock for the assignment of the purchase and sale agreement rights and was accounted for separately from the business combination as an intangible asset and amortized through expense in the fourth quarter of 2019.

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

On October 9, 2019, the Company completed the acquisition of Turfway Park from Jack Entertainment LLC ("JACK") and Hard Rock International (“Hard Rock”) for total consideration of $ 46.0 million in cash ("Turfway Park Acquisition").

Of the $ 46.0 million total consideration, $ 36.0 million, less $ 0.9 million of working capital and purchase price adjustments, was accounted for as a business combination.

The cash purchase price paid to JACK was $ 36.0 million, less $ 0.9 million of working capital and purchase price adjustments.

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property and equipment (primarily land) of $ 18.8 million, indefinite-lived gaming rights of $ 9.8 million, indefinite-lived trademark of $ 5.5 million, goodwill of $ 2.7 million, and current liabilities of $ 2.3 million.

The Company has not included other disclosures regarding the Turfway Park Acquisition because the acquisition is immaterial to our business.

On July 16, 2018, the Company announced its entry into a tax-efficient partial liquidation agreement (the "Liquidation Agreement") for the remaining 50 % ownership of the Casino at Ocean Downs and Ocean Downs Racetrack located in Berlin, Maryland ("Ocean Downs") owned by Saratoga Casino Holdings LLC ("SCH") in exchange for the Company's 25 % equity interest in SCH, which is the parent company of Saratoga Casino Hotel in Saratoga Springs, New York ("Saratoga New York") and Saratoga Casino Black Hawk in Black Hawk, Colorado ("Saratoga Colorado") (collectively, the "Ocean Downs/Saratoga Transaction").

On July 16, 2018, the Company announced the entry into a tax-efficient partial liquidation agreement (the "Liquidation Agreement") for the remaining 50 % ownership of the Casino at Ocean Downs and Ocean Downs Racetrack located in Berlin, Maryland ("Ocean Downs") owned by Saratoga Casino Holdings LLC ("SCH") in exchange for the Company's 25 % equity interest in SCH, which is the parent company of Saratoga Casino Hotel in Saratoga Springs, New York ("Saratoga New York") and Saratoga Casino Black Hawk in Black Hawk, Colorado ("Saratoga Colorado") (collectively, the "Ocean Downs/Saratoga Transaction").

On August 31, 2018, the Company closed the Ocean Downs/Saratoga Transaction, which resulted in the Company owning 100 % of Ocean Downs and having no further equity interest or management involvement in Saratoga New York or Saratoga Colorado.

As part of the Ocean Downs/Saratoga Transaction, Saratoga Harness Racing, Inc.

("SHRI") has agreed to grant the Company and its affiliates exclusive rights to operate online sports betting and iGaming on behalf of SHRI in New York and Colorado for a period of fifteen years from the date of the Liquidation Agreement, should such states permit SHRI to engage in sports betting and iGaming, subject to payment of commercially reasonable royalties to SHRI.

("SHRI") has agreed to grant the Company and our affiliates exclusive rights to operate online sports betting and iGaming on behalf of SHRI in New York and Colorado for a period of fifteen years from the date of the Liquidation Agreement, should such states permit SHRI to engage in sports betting and iGaming, subject to payment of commercially reasonable royalties to SHRI.

We consolidated Ocean Downs upon closing of the Ocean Downs/Saratoga Transaction on August 31, 2018.

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Under the acquisition method, the fair values of the consideration transferred and the Company's equity method investment in Ocean Downs, which had a fair value of $ 80.5 million at the acquisition date, were allocated to the assets acquired and liabilities assumed in the Ocean Downs/Saratoga Transaction.

The Company's carrying values in these equity method investments were significantly less than their fair values, resulting in a pre-tax gain of $ 54.9 million, which is included in the accompanying consolidated statements of comprehensive income.

The fair values of the Company's equity method investments

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

in Ocean Downs, Saratoga New York, and Saratoga Colorado were determined under the market and income valuation approaches using inputs primarily related to discounted projected cash flows and price multiples of publicly traded comparable companies.

The fair values of the Company's equity method investments in Ocean Downs, Saratoga New York, and Saratoga Colorado were determined under the market and income valuation approaches using inputs primarily related to discounted projected cash flows and price multiples of publicly traded comparable companies.

The following table summarizes the final fair values of the assets acquired and liabilities assumed, net of cash acquired of $ 13.1 million, at the acquisition date.

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Debt ( 54.7 )

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

The final fair value of the intangible assets consisted of the following:

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Total intangible assets $ 95.4

Current assets and current liabilities were valued at the existing carrying values due to their short term nature and represented management's estimated fair value of the respective items at August 31, 2018.

The debt of $ 54.7 million assumed by the Company was valued at its outstanding principal balance, which approximated fair value at August 31, 2018.

Current assets and current liabilities were valued at the existing carrying values due to their short-term nature and represent management's estimated fair value of the respective items on August 31, 2018.

The debt of $ 54.7 million assumed by the Company was valued at the Company's outstanding principal balance, which approximated fair value on August 31, 2018.

The Company subsequently paid off the debt in full on September 4, 2018.

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The renewal of the gaming rights in Maryland is subject to various legal requirements.

However, the Company's historical experience has not indicated, nor does the Company expect, any limitations regarding its ability to continue to renew its gaming rights in Maryland.

However, the Company's historical experience has not indicated, nor does the Company expect any limitations regarding the Company's ability to continue to renew the Company's gaming rights in Maryland.

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In connection with the Ocean Downs/Saratoga Transaction, the Company recorded a deferred tax liability and income tax expense of $ 12.6 million.

The deferred tax liability represents the excess of the financial reporting amounts of the net assets of

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

Ocean Downs over their respective basis under U.S., state, and local tax law expected to be applied to taxable income in the periods such differences are expected to be realized.

The deferred tax liability represents the excess of the financial reporting amounts of the net assets of Ocean Downs over their respective basis under federal, state, and local tax law expected to be applied to taxable income in the periods such differences are expected to be realized.

After the closing of the Ocean Downs/Saratoga Transaction, for the period from September 1, 2018 through December 31, 2018, net revenue for Ocean Downs was $ 25.9 million, and net income was not material.

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Net revenue $ 1,065.4

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

DISCONTINUED OPERATIONS

On November 29, 2017, the Company entered into a definitive Stock Purchase Agreement (the "Stock Purchase Agreement") to sell its mobile gaming subsidiary, Big Fish Games, Inc.

On November 29, 2017, the Company entered into a definitive Stock Purchase Agreement (the "Stock Purchase Agreement") to sell the Company's mobile gaming subsidiary, Big Fish Games, Inc.

("Big Fish Games"), a Washington corporation, to Aristocrat Technologies, Inc.

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The Big Fish Games segment and related Big Fish Transaction meet the criteria for held for sale and discontinued operation presentation.

The consolidated statements of comprehensive income and the notes to consolidated financial statements reflect the Big Fish Games segment as discontinued operations for all periods presented.

The consolidated statements of comprehensive (loss) income and the notes to consolidated financial statements reflect the Big Fish Games segment as discontinued operations for all periods presented.

Unless otherwise specified, disclosures in these consolidated financial statements reflect continuing operations only.

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The Company received cash proceeds of $ 970.7 million which was net of $ 5.2 million of working capital adjustments and $ 14.1 million of transaction costs.

The Company recognized a gain of $ 219.5 million upon the sale recorded in income from discontinued operations in the accompanying consolidated statements of comprehensive income in 2018.

The Company recognized a gain of $ 219.5 million upon the sale recorded in income from discontinued operations in the accompanying consolidated statements of comprehensive (loss) income in 2018.

The gain consisted of cash proceeds of $ 970.7 million offset by the carrying value of Big Fish Games of $ 751.2 million.

The income tax provision on the gain was $ 51.2 million, resulting in an after-tax gain of $ 168.3 million.

Kater and Thimmegowda Settlement

On May 22, 2020, we entered into an agreement in principle to settle Cheryl Kater v.

Churchill Downs Incorporated ("Kater Litigation") and Manasa Thimmegowda v.

Big Fish Games, Inc.

(the “Thimmegowda Litigation”).

The agreement in principle remains contingent on final court approval by the U.S.

District Court for the Western District of Washington (the “District Court”).

Under the terms of the settlement, which will take effect only after final court approval of the proposed class settlement:

A total of $ 155.0 million will be paid into a settlement fund.

The Company will pay $ 124.0 million pre-tax of the settlement from the Company's available cash and Aristocrat will pay the remaining $ 31.0 million pre-tax of the settlement.

The $ 124.0 million pre-tax settlement related to the Company is included in loss from discontinued operations, net of tax in the accompanying consolidated statements of comprehensive (loss) income for the year ended December 31, 2020, and on a pre-tax basis in current liabilities of discontinued operations in the accompanying consolidated balance sheet as of December 31, 2020.

All members of the nationwide settlement class who do not exclude themselves will release all claims relating to the subject matter of the lawsuits.

Aristocrat has agreed to specifically release the Company of any and all indemnification obligations under the Stock Purchase Agreement arising from or related to the Kater Litigation and the Thimmegowda Litigation, including any claims of diminution of value of Big Fish Games and any claims by any person who opts out of the proposed class settlement.

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

The following table presents the financial results of Big Fish Games included in "Income from discontinued operations, net of tax" in the accompanying consolidated statements of comprehensive income:

The following table presents the financial results of Big Fish Games included in "Income from discontinued operations, net of tax" in the accompanying consolidated statements of comprehensive (loss) income:

Years Ended December 31,

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Research and development — — 0.9

Transaction expense, net — — 4.7

Legal settlement 124.0 — —

Total operating expense 124.1 3.5 15.3

Operating (loss) income ( 3.5 ) ( 2.1 ) 24.9

Other income (expense)

Operating loss ( 124.1 ) ( 3.5 ) ( 2.1 )

Gain on sale of Big Fish Games — — 219.5

Other expense — 0.1 ( 1.7 )

Total other income (loss) — 219.6 ( 1.7 )

Other income — — 0.1

Total other income — — 219.6

(Loss) income from discontinued operations before provision for income taxes ( 124.1 ) ( 3.5 ) 217.5

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Stock-Based Compensation

As part of the Big Fish Transaction, the vesting dates for all outstanding unvested restricted stock awards, restricted stock unit awards, and performance share units awards (collectively the "Stock Awards") for certain Big Fish Games' employees were accelerated to vest on the closing date.

As part of the Big Fish Transaction, the vesting dates for all outstanding unvested restricted stock awards, restricted stock unit awards, and performance share unit awards (collectively the "Stock Awards") for certain Big Fish Games' employees were accelerated to vest on the closing date.

Most of these Stock Awards would not have vested prior to the closing date of the Big Fish Transaction.

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The expense was amortized during the period from the date of the announcement to the closing of the Big Fish Transaction.

The incremental stock-based compensation expense recognized during 2017 due to the acceleration of vesting was $ 3.4 million, which is included in income from discontinued operations, net of tax in the accompanying consolidated statements of comprehensive income.

Total stock-based compensation expense related to Big Fish Games, which includes the accelerated vesting of the Stock Awards and stock options associated with the Company's employee stock purchase plan, was $ 3.4 million in 2018 and $ 11.1 million in 2017.

Earnout Liabilities

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Subtotal 1,059.8 912.5

Right-of-use assets 24.8 —

Operating lease right-of-use assets 22.3 24.8

Total $ 1,082.1 $ 937.3

Depreciation expense was $ 81.4 million in 2019, $ 57.6 million in 2018 and $ 49.1 million in 2017 and is classified in operating expense in the accompanying consolidated statements of comprehensive income.

During the fourth quarter of 2017, the Company recorded a $ 13.7 million non-cash impairment charge related to certain iGaming assets included in our Online Wagering segment.

The impairment was due to a change in the Company's planned usage of these assets.

In the first quarter of 2019, we realigned our segments as described in Note 1, Description of Business.

This change resulted in the allocation of the previous Racing segment goodwill balance of $ 51.7 million as follows:

$ 49.7 million to the Churchill Downs segment, $ 1.0 million to the Gaming segment, and $ 1.0 million to All Other, based on the relative fair value approach.

The Company evaluated whether an interim goodwill impairment test should be performed as a result of our segment changes.

Based on this evaluation, the Company determined this event did not indicate it was more likely than not that a goodwill impairment exists.

Depreciation expense was $ 88.0 million in 2020, $ 81.4 million in 2019 and $ 57.6 million in 2018 and is classified in operating expense in the accompanying consolidated statements of comprehensive (loss) income .

Goodwill, by segment, is comprised of the following:

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Balances as of December 31, 2019 49.7 148.2 165.2 4.0 367.1

Additions — — 26.1 3.0 29.1

Adjustments — — — $ ( 0.3 ) ( 0.3 )

Balances as of December 31, 2020 $ 49.7 $ 148.2 $ 165.2 $ 3.7 $ 366.8

In 2019, we established goodwill of $ 26.1 million related to the Presque Isle Transaction, and $ 3.0 million related to the Turfway Park Acquisition.

In 2018, we established goodwill of $ 20.4 million related to the Ocean Downs/Saratoga Transaction.

We performed our annual goodwill impairment analysis as of April 1, 2019 and no adjustment to the carrying value of goodwill was required.

We elected to bypass the qualitative assessment and proceeded directly to perform step one fair value calculations on a quantitative basis for each reporting unit.

We concluded that the fair values of our reporting units exceeded their carrying value and therefore step two of the assessment was not required.

We performed our annual goodwill impairment analysis as of April 1, 2020.

We assessed goodwill for impairment by performing qualitative or quantitative analyses for each reporting unit.

Based on the results of these analyses, no goodwill impairments were identified in connection with our annual impairment testing.

During 2020, we recorded an immaterial measurement period adjustment for the Turfway Park Acquisition that impacted the All Other goodwill balance.

Churchill Downs Incorporated

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OTHER INTANGIBLE ASSETS

Other intangible assets, net are comprised of the following:

Other intangible assets, net is comprised of the following:

December 31, 2020 December 31, 2019

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We also established definite-lived intangible assets of $ 2.3 million relating to the opening of Derby City Gaming and $ 0.1 million relating to the Ocean Downs/Saratoga Transaction for other intangibles.

Amortization expense for definite-lived intangible assets was $ 15.0 million in 2019, $ 6.0 million in 2018, and $ 6.8 million in 2017 and is classified in operating expense in the accompanying consolidated statements of comprehensive income.

As described further in Note 3, Acquisitions, we accelerated the amortization for the assignment of the Turfway Park Acquisition purchase and sale agreement rights of $ 10.0 million in the fourth quarter of 2019, which is included in All Other in the accompanying consolidated statements of comprehensive income.

Amortization expense for definite-lived intangible assets was $ 4.9 million in 2020, $ 15.0 million in 2019, and $ 6.0 million in 2018, and is classified in operating expense in the accompanying consolidated statements of comprehensive (loss) income.

We submitted payments of $ 2.3 million in 2020 and 2019 for annual license fees for Calder, which are being amortized to expense over the annual license period.

Indefinite-lived intangible assets consist primarily of trademarks and state gaming rights in Maine, Maryland, Mississippi, Louisiana, Pennsylvania and Kentucky.

Refer to Note 8, Asset Impairment, for information regarding intangible asset impairments recognized during the first quarter of 2020.

We performed our annual indefinite-lived intangible assets impairment analysis as of April 1, 2020, which included an assessment of qualitative and quantitative factors to determine whether it is more likely than not that the fair values of the indefinite-lived intangible assets are less than the carrying amount.

We concluded that the fair values of our indefinite-lived intangible assets exceeded their carrying value, and therefore step two of the assessment was not required.

During 2017, the Company recorded a $ 4.7 million non-cash impairment charge related to our Bluff operations ($ 4.5 million for a trademark and $ 0.2 million related to customer relationships), which is included in our Online Wagering segment, and a $ 3.3 million non-cash impairment charge related to our Illinois Horseracing Equity Trust, which is included in All Other in the accompanying consolidated statements of comprehensive income.

These impairments were due to changes in the business climate in 2017 that resulted in projected future cash flows being less than carrying value.

We concluded that the fair values of our indefinite-lived intangible assets exceeded their carrying value.

Churchill Downs Incorporated

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Future estimated amortization expense does not include additional payments of $ 2.3 million in 2021 and in each year thereafter for the ongoing amortization of future expected annual Calder license fees not yet incurred or paid.

Components of the provision for income taxes are as follows:

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

ASSET IMPAIRMENT

During the quarter ended March 31, 2020, the Company evaluated whether events or circumstances changed that would indicate it is more likely than not that any of the Company's intangible assets, goodwill, or property and equipment, were impaired ("Trigger Event"), or if there were any other than temporary impairments of our equity investments.

Factors considered in this evaluation included, among other things, the amount of the fair value over carrying value from the annual impairment testing performed as of April 1, 2019, changes in carrying values, changes in discount rates, and the impact of temporary property closures due to the COVID-19 global pandemic on cash flows.

Because Presque Isle was acquired in 2019, we did not expect the estimated fair value and the carry value to be significantly different.

Based on the Company's evaluation, the Company concluded that a Trigger Event occurred related to the Presque Isle gaming rights, trademark, and the reporting unit's goodwill due to the impact and uncertainty of the COVID-19 global pandemic.

The initial fair value of Presque Isle gaming rights in the first quarter of 2019 was determined using the Greenfield Method, which is an income approach methodology that calculates the present value based on a projected cash flow stream.

This method assumes that the Presque Isle gaming rights provide the opportunity to develop a casino and online wagering platform in a specified region, and that the present value of the projected cash flows are a result of the realization of advantages contained in these rights.

Under this methodology, the acquirer is expected to absorb all start-up costs, as well as incur all expenses pertaining to the acquisition and / or the creation of all tangible and intangible assets.

The estimated future revenue, operating expenses, start-up costs, and discount rate were the primary inputs in the valuation.

Based on the Trigger Event, the Company updated the discount rate to reflect the increased uncertainty of the cash flows and updated the projected cash flow stream.

As a result, the $ 77.6 million carrying value of the Presque Isle gaming rights exceeded the fair value of $ 62.6 million and the Company recognized an impairment of $ 15.0 million in first quarter of 2020 for the Presque Isle gaming rights ($ 12.5 million related to the Gaming segment and $ 2.5 million related to the Online Wagering segment).

The Presque Isle trademark was initially valued in first quarter of 2019 using the relief-from-royalty method of the income approach, which estimates the fair value of the intangible asset by discounting the fair value of the hypothetical royalty payments a market participant would be willing to pay to enjoy the benefits of the asset.

The estimated future revenue, royalty rate, and discount rate were the primary inputs in the valuation of the trademark.

Based on the Trigger Event, the Company updated the discount rate to reflect the increased uncertainty of the cash flows and updated projected cash flow stream.

As a result, the Company recognized an impairment of $ 2.5 million in the first quarter of 2020 for the Presque Isle trademark.

The fair value of the Presque Isle reporting unit's goodwill was determined under the market and income valuation approaches using inputs primarily related to discounted projected cash flows and price multiples of publicly traded comparable companies.

In accordance with Accounting Standards Codification 350, Intangibles - Goodwill and Other, the Company performed the impairment testing of the Presque Isle gaming rights and trademark prior to testing Presque Isle goodwill.

Based on the Trigger Event, the Company updated the discount rate to reflect the increased uncertainty of the cash flows and updated project cash flow stream.

As a result, the Company did not recognize an impairment for Presque Isle goodwill in the first quarter of 2020 because the fair value exceeded the carrying value.

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

Components of the (benefit) provision for income taxes are as follows:

Years Ended December 31,

(in millions) 2020 2019 2018

Current provision:

Current (benefit) provision:

Federal $ ( 38.7 ) $ 19.2 $ 10.1

State and local 3.0 6.0 3.8

Foreign 0.1 — —

( 35.6 ) 25.2 13.9

Deferred provision (benefit):

Deferred provision:

Federal 28.7 16.1 35.0

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30.3 31.6 37.4

$ 56.8 $ 51.3 $ ( 19.9 )

Income tax (benefit) provision $ ( 5.3 ) $ 56.8 $ 51.3

Income from continuing operations before provision for income taxes were as follows:

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Foreign ( 0.2 ) — ( 0.3 )

$ 196.4 $ 233.9 $ 102.5

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

Our income tax expense is different from the amount computed by applying the federal statutory income tax rate to income from continuing operations before taxes as follows:

Income from continuing operations before provision for income taxes $ 8.0 $ 196.4 $ 233.9

Our income tax (benefit) expense is different from the amount computed by applying the federal statutory income tax rate to income from continuing operations before taxes as follows:

Years Ended December 31,

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State income taxes, net of federal income tax benefit ( 0.6 ) 8.0 5.4

Net operating loss carry back - CARES Act ( 13.3 ) — —

Windfall deduction from equity compensation ( 5.1 ) ( 5.2 ) ( 4.7 )

Non-deductible officer's compensation 7.3 5.5 2.6

Re-measurement of deferred taxes 1.9 8.3 —

Windfall deduction from equity compensation ( 5.2 ) ( 4.7 ) ( 5.2 )

Uncertain tax positions 1.7 ( 1.0 ) —

Valuation allowance - state and foreign net operating losses 1.1 — —

Other — — ( 1.1 )

$ 56.8 $ 51.3 $ ( 19.9 )

During 2019, the Company recognized $ 8.3 million of income tax expense from the re-measurement of our net deferred tax liabilities based on an increase in income attributable to states with higher tax rates compared to the prior period.

Income tax (benefit) provision $ ( 5.3 ) $ 56.8 $ 51.3

On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act") was signed into law.

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The Tax Act also enhanced and extended through 2026 the option to claim accelerated depreciation deductions on qualified property.

In 2017, the Company recognized $ 56.9 million of future tax benefits from the re-measurement of its deferred tax assets and liabilities at December 22, 2017, using the maximum U.S.

federal tax rate of 21%, and $ 0.8 million of tax benefits in relation to the mandatory deemed repatriation of its foreign earnings and profits pursuant to the Tax Act in combination with the reversal of deferred tax liabilities that had been maintained on foreign earnings.

In 2018 and 2019, the Company's federal income tax expense was based on the new 21% corporate tax rate.

In accordance with Staff Accounting Bulletin No.

118 (“SAB 118”), the Company recorded provisional tax expense of $ 5.6 million in 2017 related to non-deductible officer’s compensation and the tax consequences of mandatory deemed repatriation required by the Tax Act.

The Company also recorded a provisional tax benefit of $ 19.7 million for the accelerated cost recovery allowance granted by the Tax Act, effective September 27, 2017.

In the fourth quarter of 2018, the Company finalized its accounting for these estimates and recorded immaterial adjustments as of December 31, 2018, including any subsequent impact to the re-measurement of deferred taxes at a reduced tax rate of 21%.

The CARES Act provides, among other things, that any net operating loss arising in a tax year beginning in 2018, 2019 or 2020 may be carried back five years or carried forward indefinitely, offsetting up to 100 % of taxable income in tax years beginning

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

The Company intends to carry back our 2020 net operating loss to claim a refund of taxes paid in a year before the statutory corporate tax rate was reduced from 35% to 21% by the Tax Act.

Due to the higher statutory rate applied to this net operating loss, the Company recognized an income tax benefit of $ 13.3 million for the year ended December 31, 2020.

The Company recognized $ 1.9 million during 2020 and $ 8.3 million during 2019 of income tax expense from the re-measurement of our net deferred tax liabilities based on an increase in income attributable to states with higher tax rates compared to the prior period.

The Company will generate a capital loss associated with the Kater litigation.

We have recorded a $ 29.0 million deferred tax asset without a valuation allowance for the capital loss in 2020, as we fully expect to be able to offset the capital loss with previously recognized capital gains.

Components of our deferred tax assets and liabilities were as follows:

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Deferred tax assets:

Capital loss $ 29.0 $ —

Net operating losses and credit carryforward 9.3 3.4

Lease liabilities 7.7 6.8

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Deferred income 5.5 4.8

Net operating losses and credit carryforward 3.4 3.7

Deferred liabilities 2.8 2.7

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Equity investments in excess of tax basis 121.6 114.8

Intangible assets in excess of tax basis 60.2 49.3

Property and equipment in excess of tax basis 77.9 53.4

Intangible assets in excess of tax basis 65.6 60.2

Right-of-use assets 7.4 6.8

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We believe that we will be able to fully utilize all of these losses.

We also have state net operating losses valued at $ 0.7 million.

We have recorded a valuation allowance of $ 0.2 million against the state net operating losses due to the fact that it is unlikely that we will generate income in certain states which is necessary to utilize the assets.

We also have state net operating losses of $ 7.3 million.

We have recorded a valuation allowance of $ 1.1 million against the state net operating losses due to the fact that it is unlikely that we will generate income in certain states which is necessary to utilize the deferred tax assets.

The Internal Revenue Service has completed audits through 2012.

Tax years 2017 and after are open to examination.

State and local tax years open for examination vary by jurisdiction.

As of December 31, 2020, we had approximately $ 3.9 million of total gross unrecognized tax benefits, excluding interest of $ 0.2 million.

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We anticipate a decrease in our unrecognized tax positions of approximately $ 0.8 million during the next twelve months primarily due to the expiration of statutes of limitation.

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

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Balance as of December 31 $ 3.9 $ 1.8 $ 2.8

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

SHAREHOLDERS’ EQUITY

Stock Repurchase Program

On April 25, 2017, the Board of Directors of the Company approved a new common stock repurchase program of up to $ 250.0 million.

The program replaced the prior $ 150.0 million program that was authorized in February 2016 and had unused authorization of $ 114.6 million.

The authorized amount included and was not in addition to any unspent amount remaining under the prior authorization in February 2016.

Repurchases could be made at management’s discretion from time to time on the open market (either with or without a 10b5-1 plan) or through privately negotiated transactions.

Share repurchases resulted in the shares being retired, and the cost of the shares acquired were treated as a reduction from common stock and retained earnings.

The repurchase program had no time limit and could be suspended or discontinued at any time.

On June 9, 2017, we entered into an agreement with a related party, The Duchossois Group ("TDG"), to repurchase 3,000,000 shares of the Company's common stock for $ 52.93 per share in a privately negotiated transaction.

The aggregate purchase price was $ 158.8 million.

For the year ended December 31, 2017, including the repurchase of 3,000,000 shares from TDG, we repurchased 3,231,087 shares of our common stock under the April 2017 stock repurchase program at a total cost of $ 171.7 million.

We had approximately $ 78.3 million of repurchase authority remaining under this program at December 31, 2017.

On November 29, 2017, the Board of Directors of the Company authorized a $ 500.0 million share repurchase program in a "modified Dutch auction" tender offer (the "Tender Offer") utilizing a portion of the proceeds from the Big Fish Transaction.

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On October 30, 2018, the Board of Directors of the Company approved a new common stock repurchase program of up to $ 300.0 million.

The new program replaced the prior $ 250.0 million program that was authorized in April 2017 and had unused authorization of $ 78.3 million.

The new authorized amount includes and is not in addition to any unspent amount remaining under the prior authorization.

Repurchases may be made at management’s discretion from time to time on the open market (either with or without a 10b5-1 plan) or through privately negotiated transactions.

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We had $ 147.1 million of repurchase authority remaining under this program at December 31, 2020.

As of December 31, 2019, we accrued $ 0.5 million for the future cash settlement of executed repurchases of our common stock compared to $ 2.5 million as of December 31, 2018.

For the year ended December 31, 2019, we repurchased 864,233 shares of our common stock under the October 2018 stock repurchase program at a total cost of $ 93.0 million.

As of December 31, 2019, we accrued $ 0.5 million for the future cash settlement of executed repurchases of our common stock.

For the year ended December 31, 2018, excluding the shares purchased under the Tender Offer, we repurchased 372,282 shares of our common stock under the October 2018 stock repurchase program at a total cost of $ 32.0 million.

On October 30, 2018, the Company’s Board of Directors approved the Stock Split and an amendment to the Company’s Articles of Incorporation to increase the number of shares of common stock the Company is authorized to issue from 50,000,000 shares, no par value, to 150,000,000 shares, no par value.

Privately Negotiated Share Repurchase

Refer to Note 23, Subsequent Events, for information regarding the Company's privately negotiated share repurchase on February 1, 2021.

On October 30, 2018, the Company’s Board of Directors approved a three-for-one stock split (the "Stock Split") and an amendment to the Company’s Articles of Incorporation to increase the number of shares of common stock the Company is authorized to issue from 50,000,000 shares, no par value, to 150,000,000 shares, no par value.

This amendment to the Company’s Articles of Incorporation became effective on January 25, 2019 and our common stock began trading at the split-adjusted price on January 28, 2019.

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2016 Omnibus Stock Incentive Plan

On February 24, 2016, we replaced our previous stock compensation program, the Churchill Downs Incorporated 2007 Omnibus Stock Incentive Plan (the "2007 Incentive Plan") with a new program, the Churchill Downs Incorporated 2016

We have a stock-based employee compensation plan with awards outstanding under the Churchill Downs Incorporated 2016 Omnibus Stock Incentive Plan (the “2016 Plan”) and Executive Long-Term Incentive Compensation Plan, which was adopted pursuant to the 2016 Plan.

The 2016 Incentive Plan is intended to advance our long-term success by encouraging stock ownership among key employees and the Board of Directors.

Awards may be in the form of stock options, stock appreciation

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

Omnibus Stock Incentive Plan (the "2016 Incentive Plan").

The 2016 Incentive Plan is intended to advance our long-term success by encouraging stock ownership among key employees and the Board of Directors.

Awards may be in the form of stock options, stock appreciation rights, restricted stock ("RSA"), restricted stock units ("RSU"), performance share units ("PSU"), performance units, or performance cash.

rights, restricted stock ("RSA"), restricted stock units ("RSU"), performance share units ("PSU"), performance units, or performance cash.

The 2016 Incentive Plan has a minimum vesting period of one year for awards granted.

Restricted Stock, Restricted Stock Units, and Performance Share Units

The 2007 Incentive Plan and the 2016 Incentive Plan (collectively "the 2007 and 2016 Plans") permit the award of RSAs, RSUs, or PSUs to directors and key employees responsible for the management, growth and protection of our business.

The fair value of RSAs and RSUs that vest solely based on continued service under the 2007 and 2016 Plans is determined by the product of the number of shares granted and the grant date market price of our common stock.

RSAs and RSUs granted to employees under the 2007 and 2016 Plans generally vest either in full upon three years from the date of grant or on a pro rata basis over a three -year term.

The 2016 Incentive Plan permits the award of RSAs, RSUs, or PSUs to directors and key employees responsible for the management, growth and protection of our business.

The fair value of RSAs and RSUs that vest solely based on continued service under the Plan is determined by the product of the number of shares granted and the grant date market price of our common stock.

RSAs and RSUs granted to employees under the 2016 Plan generally vests either in full upon three years from the date of grant or on a pro rata basis over a three -year term.

RSAs are legally issued common stock at the time of grant, with certain restrictions placed on them.

RSUs granted to employees are converted into shares of our common stock at vesting.

The RSUs granted to directors under the 2007 and 2016 Plans generally vest in full upon one year from the date of grant.

The RSUs granted to directors under the 2016 Plan generally vests in full upon one year from the date of grant.

RSUs granted to directors are converted into shares of our common stock at the time of the director's retirement.

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Measurement against these criteria will be determined against a payout curve which provides up to 200 % of performance share units based on the original award.

The TSR criteria for the PSU Awards is related to the Company’s TSR relative to the TSR of companies in the Russell 2000 index during the performance period.

The PSU Awards may be adjusted based on the Company’s relative TSR performance as follows:

The PSU Awards may be adjusted based on the Company’s TSR performance relative to the TSR performance during the performance period of the Companies remaining in the Russell 2000 index at the end of the performance period as follows:

The PSU Awards will increase by 25 % if the Company’s TSR is in the top quartile;

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On February 12, 2020, the Compensation Committee offered, and the NEOs accepted, to settle the 2017 PSU Awards in cash.

In October 2018, the Company granted RSU awards (the "2018 RSU Awards") and TSR PSU awards (the "2018 TSR PSU Awards") to certain NEOs.

The 2018 RSU Awards contain a seven year service period and vest on a pro rata basis over a four year period beginning on the fourth anniversary of the award.

The total number of 2018 TSR PSU Awards earned will vary between 0 % to 200 % of the award amount depending on the Company's TSR relative to the TSR of companies in the Russell 2000 index over a three -year performance period.

At the end of the three year performance period, the 2018 TSR PSU Awards will vest on a pro rata basis over the remaining four year service period beginning on the fourth anniversary of the award.

The total compensation cost recognized for PSU Awards and 2018 TSR PSU Awards is determined using the Monte Carlo valuation methodology, which factors in the value of the TSR when determining the grant date fair value of the award.

Compensation cost for the PSU Awards is recognized during the three year performance and service period based on the probable achievement of the two performance criteria.

Compensation cost for the TSR PSU Awards is recognized during the seven year service period.

In October 2018, the Company granted a special equity award to two NEOs (" 7 -Year Grant") consisting of PSU Awards that may be adjusted up to 200 % based on the Company's relative TSR performance versus the Russell 2000 over a three -year period, and service-based RSU awards, both of which vest which vest in 25 % annual increments over four years beginning on the fourth anniversary of the grant date, totaling seven years to be fully vested.

The total compensation cost recognized for PSU Awards is determined using the Monte Carlo valuation methodology, which factors in the value of the TSR when determining the grant date fair value of the award.

Compensation cost for the PSU Awards is recognized during the three -year performance and service period based on the probable achievement of the two performance criteria, with the exception of the 7 -Year Grant, which compensation cost is recognized during the seven -year service period.

All PSUs awards are converted into shares of our common stock at the time the award value is finalized.

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

A summary of the 2019 RSAs, RSUs, and PSUs granted to certain NEOs, employees, and directors is presented below (shares/units in thousands):

Grant Year Award Type Number of Shares/Units Awarded (1)

A summary of the 2020 RSUs, and PSUs granted to certain NEOs, employees, and the Board of Directors is presented below (shares/units in thousands):

Grant Year Award Type Number of Units Awarded (1)

Vesting Terms

2019 RSA 65 Vest equally over three service periods ending in 2020, 2021 and 2022

2020 RSU 82 Vest equally over three service periods ending in 2021, 2022, and 2023

2019 RSU 10 One year service period ending in 2020

2020 PSU 37 Three -year performance and service period ending in 2022

2020 RSU 12 One year service period ending in 2021

(1) PSUs presented are based on the target number of units for the original PSU grant.

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

Activity for our RSAs, RSUs, and PSUs is presented below (shares/units in thousands):

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(1) Adjustment to number of target units awarded for PSUs based on achievement of performance and TSR goals.

The fair value of shares and units vested was $ 36.9 million in 2019, $ 32.4 million in 2018, and $ 29.6 million in 2017.

The fair value of shares and units vested was $ 36.9 million in 2020 and 2019, and $ 32.4 million in 2018.

A summary of total unrecognized stock-based compensation expense related to RSAs, RSUs, and PSUs (based on current performance estimates), at December 31, 2020 is presented below:

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Total $ 24.9 2.49

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

Employee Stock Purchase Plan

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Each period commences on August 1 and ends on the following July 31.

Compensation expense related to the ESP Plan was not material for any year included in our accompanying consolidated statements of comprehensive income.

Compensation expense related to the ESP Plan was not material for any year included in our accompanying consolidated statements of comprehensive (loss) income.

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

The following table presents our total debt outstanding:

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Term Loan B due 2024 $ 388.0 $ 3.2 $ 384.8

Revolver 149.7 — 149.7

2027 Senior Notes 600.0 6.8 593.2

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2027 Senior Notes 600.0 8.0 592.0

2028 Senior Notes 500.0 6.1 493.9

Total debt 1,492.0 18.1 1,473.9

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Credit Agreement

On December 27, 2017, we entered into a senior secured credit agreement (the "2017 Credit Agreement") with a syndicate of lenders.

The 2017 Credit Agreement replaced our 2014 senior secured credit agreement (the "2014 Credit Agreement").

On December 27, 2017, we entered into a senior secured credit agreement (as amended, the "Credit Agreement") with a syndicate of lenders.

The Credit Agreement provides for a $ 700.0 million senior secured revolving credit facility due 2022 (the "Revolver") and a $ 400.0 million senior secured term loan B due 2024 (the "Term Loan B").

Included in the maximum borrowing of $ 700.0 million under the Revolver is a letter of credit sub facility not to exceed $ 50.0 million and a swing line commitment up to a maximum principal amount of $ 50.0 million.

We had $ 694.4 million of available borrowing capacity, after consideration of $ 5.6 million in outstanding letters of credit, under the Revolver as of December 31, 2019.

The Credit Agreement is collateralized by substantially all of the wholly-owned assets of the Company.

The Company capitalized $ 1.6 million of debt issuance costs associated with the Revolver which is being amortized as interest expense over the shorter of the respective debt period or 5 years.

The Company also capitalized $ 5.1 million of debt issuance costs associated with the Term Loan B portion of the Credit Agreement which is being amortized as interest expense over the shorter of the respective debt period or 7 years.

The interest rates applicable to the Company’s borrowings under the Credit Agreement are LIBOR-based plus a spread, as determined by the Company's consolidated total net leverage ratio.

The Term Loan B requires quarterly payments of 0.25 % of the original $ 400.0 million balance, or $ 1.0 million per quarter.

The Term Loan B may be subject to additional mandatory prepayment from excess cash flow on an annual basis per the provisions of the Credit Agreement.

The Company is required to pay a commitment fee on the unused portion of the Revolver determined by a pricing grid based on the consolidated total net secured leverage ratio of the Company.

The Company is required to pay a commitment fee on the unused portion of the Revolver as determined by a pricing grid based on the consolidated total net secured leverage ratio of the Company.

For the period ended December 31, 2020, the Company's commitment fee rate was 0.30 %.

The Revolver bears interest at LIBOR plus a spread as determined by the Company's net leverage ratio, which was LIBOR plus 150 points at December 31, 2019.

The Term Loan B bears interest at LIBOR plus 200 basis points.

The Credit Agreement contains certain customary affirmative and negative covenants, which include limitations on liens, investments, indebtedness, dispositions, mergers and acquisitions, the making of restricted payments, changes in the nature of business, changes in fiscal year, and transactions with affiliates.

The 2017 Credit Agreement also contains financial covenants

The Credit Agreement also contains financial covenants providing for the maintenance of a maximum consolidated secured net leverage ratio ( 4.0 to 1.0 or 4.5 to 1.0 for the year following any permitted acquisition greater than $ 100.0 million) and the maintenance of a minimum consolidated interest coverage ratio of 2.5 to 1.0.

On March 16, 2020, the Company entered into the First Amendment to the Credit Agreement (the “First Amendment”).

The First Amendment extended the maturity for the Company’s Revolver from December 27, 2022 to at least September 27, 2024,

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

providing for the maintenance of a maximum consolidated secured net leverage ratio ( 4.0 to 1.0 or 4.5 to 1.0 for the year following any permitted acquisition greater than $ 100.0 million) and the maintenance of a minimum consolidated interest coverage ratio of 2.5 to 1.0.

The Company was in compliance with all applicable covenants in the 2017 Credit Agreement at December 31, 2019.

The Company utilized borrowings from the Revolver to fund a portion of the purchase price related to the closing of the Presque Isle Transaction on January 11, 2019.

As a result of the Company's 2017 Credit Agreement, $ 5.1 million of debt issuance costs were capitalized associated with the Term Loan B and are amortized as interest expense over the shorter of the respective debt period or 7 years.

The Company also capitalized $ 1.6 million of debt issuance costs associated with the Revolver which are amortized as interest expense over the shorter of the respective debt period or 5 years.

which is 91 days prior to the latest maturity date of the Company’s term loan facility on December 27, 2024.

The First Amendment also lowered the upper limit of the applied spreads with respect to revolving loans from 2.25 % to 1.75 % and for commitment fees with respect thereto from 0.35 % to 0.30 % and provides a reduced pricing schedule for outstanding borrowings and commitment fees with respect to the Revolver across all other leverage pricing levels.

The First Amendment did not alter the Company’s borrowing capacity.

The Company capitalized $ 2.0 million of debt issuance costs associated with the First Amendment which will be amortized as interest expense over the remaining duration of the Revolver.

The Company had an outstanding balance of $ 149.7 million and had $ 545.8 million available on the Revolver as of December 31, 2020.

The Company had $ 67.4 million of cash and cash equivalents as of December 31, 2020.

On April 28, 2020, the Company entered into a Second Amendment to the Credit Agreement (the “Second Amendment”).

The Second Amendment (i) provides for a financial covenant relief period through the date on which the Company delivers the Company’s quarterly financial statements and compliance certificate for the fiscal quarter ending June 30, 2021, subject to certain exceptions (the “Financial Covenant Relief Period”), (ii) amends the definition of “Consolidated EBITDA” in the Credit Agreement with respect to the calculation of Consolidated EBITDA for the first two fiscal quarters after the termination of the Financial Covenant Relief Period, (iii) extends certain deadlines and makes certain other amendments to the Company’s financial reporting obligations, (iv) places certain restrictions on restricted payments during the Financial Covenant Relief Period, and (v) amends the definitions of “Material Adverse Effect” and “License Revocation” in the Credit Agreement to take into consideration COVID-19.

During the Financial Covenant Relief Period, the Company will not be required to comply with the consolidated total secured net leverage ratio financial covenant and the interest coverage ratio financial covenant.

The Company has agreed to a minimum liquidity financial covenant that requires the Company and restricted subsidiaries to maintain liquidity of at least $ 150.0 million during the Financial Covenant Relief Period.

While the Second Amendment is in effect, the Company agreed to limit restricted payments to $ 26.0 million.

On February 1, 2021, the Company entered into the Third Amendment to the Credit Agreement to increase the restricted payments capacity during the Financial Covenant Relief Period, as defined in the Second Amendment, from $ 26.0 million to $ 226.0 million to accommodate a share repurchase from an affiliate of The Duchossois Group, Inc.

The Company repurchased the shares using available cash and borrowings under the Company's Revolver.

Refer to Note 23, Subsequent Events, for information regarding this transaction.

The interest rate on the Revolver on December 31, 2020 was LIBOR plus 175 points based on the Revolver pricing grid in the Second Amendment and the Company's net leverage ratio as of December 31, 2020.

The Term Loan B bears interest at LIBOR plus 200 basis points.

Although the Company was not required to meet the Company’s financial covenants under the Credit Agreement on December 31, 2020 (as a result of the Second Amendment), the Company was compliant with all applicable covenants on December 31, 2020.

2027 Senior Notes

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The 2027 Senior Notes were issued at par, with interest payable on April 1 st and October 1 st of each year, commencing on October 1, 2019.

The Company used the net proceeds from the offering to repay our outstanding balance on our 2017 Senior Secured credit agreement (the "2017 Credit Agreement").

The Company used the net proceeds from the offering to repay our outstanding balance on the Credit Agreement.

In connection with the offering, we capitalized $ 8.9 million of debt issuance costs which are being amortized as interest expense over the term of the 2027 Senior Notes.

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and (viii) enter into transactions with affiliates.

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

In connection with the issuance of the 2027 Senior Notes, the Company and the 2027 Guarantors entered into a Registration Rights Agreement to register any 2027 Senior Notes under the Securities Act for resale that are not freely tradable 366 days from March 25, 2019.

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In connection with the offering, we capitalized $ 7.7 million of debt issuance costs which are being amortized as interest expense over the term of the 2028 Senior Notes.

The 2028 Senior Notes were issued pursuant to an indenture, dated December 27, 2017 (the "2028 Indenture"), among the Company, certain subsidiaries of the Company as guarantors (the "2028 Guarantors"), and U.S Bank National Association, as trustee.

Bank National Association, as trustee.

The Company may redeem some or all of the 2028 Senior Notes at any time prior to January 15, 2023, at a price equal to 100 % of the principal amount of the 2028 Senior Notes redeemed plus an applicable make-whole premium.

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and (viii) enter into transactions with affiliates.

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

In connection with the issuance of the 2028 Senior Notes, the Company and the 2028 Guarantors entered into a Registration Rights Agreement to register any 2028 Senior Notes under the Securities Act for resale that are not freely tradable 366 days from December 27, 2017.

2021 Senior Notes

The 2021 Senior Notes were comprised of 5.375 % Senior Unsecured Notes that were scheduled to mature on December 15, 2021, which were issued in an initial offering of $ 300.0 million in aggregate principal amount at par, completed on December 16, 2013, and an additional offering of $ 300.0 million in aggregate principal amount at 101 % completed on December 16, 2015.

Interest on the 2021 Senior Notes was payable on June 15th and December 15th of each year.

The Company used the proceeds from the 2017 Credit Agreement and 2028 Senior Notes to redeem the 2021 Senior Notes and to pay related fees and expenses.

The 2021 Senior Notes were redeemed at a price equal to the principal amount thereof and the applicable "make-whole" premium, $ 16.1 million, which is included in loss on extinguishment of debt in the accompanying consolidated statements of comprehensive income in 2017.

The Company accounted for the redemption of the 2021 Senior Notes as an extinguishment and wrote off $ 6.3 million of unamortized debt issuance costs and incurred a benefit of $ 2.0 million related to the unamortized bond premium, both of which are included in loss on extinguishment of debt in the accompanying consolidated statements of comprehensive income.

The Company also expensed approximately $ 0.4 million of debt issuance costs relating to our 2014 Credit Agreement in the fourth quarter of 2017, which is included in loss on extinguishment of debt in the accompanying consolidated statements of comprehensive income.

Future aggregate maturities of total debt are as follows (in millions):

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Contract Assets and Contract Liabilities

As of December 31, 2019 and 2018, contract assets were not material.

As of December 31, 2019 and 2018, contract liabilities were $ 63.1 million and $ 69.9 million, respectively, which are included in current deferred revenue, non-current deferred revenue, and accrued expense and other current liabilities in the accompanying consolidated balance sheets.

Contract liabilities primarily relate to our Churchill Downs segment and the decrease was primarily due to revenue recognized for fulfilled performance obligations.

We recognized $ 51.2 million of revenue during the year ended December 31, 2019 that was included in the contract liabilities balance at December 31, 2018.

We recognized $ 53.7 million of revenue during the year ended December 31, 2018 that was included in the contract liabilities balance at January 1, 2018.

Contract assets were not material as of December 31, 2020 and 2019.

Contract liabilities were $ 53.7 million as of December 31, 2020 and $ 63.1 million as of December 31, 2019.

Contract liabilities are included in current deferred revenue, non-current deferred revenue, and accrued expense and other current liabilities in the

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

accompanying consolidated balance sheets.

Contract liabilities primarily relate to our Churchill Downs segment and the decrease was primarily due to revenue recognized for performance obligations related to Churchill Downs Racetrack that were fulfilled in 2020.

We recognized $ 6.7 million of revenue during the year ended December 31, 2020 that was included in the contract liabilities balance at December 31, 2019.

We recognized $ 51.2 million of revenue during the year ended December 31, 2019 that was included in the contract liabilities balance at December 31, 2018.

We recognized $ 53.7 million of revenue during the year ended December 31, 2018 that was included in the contract liabilities balance at January 1, 2018.

Disaggregation of Revenue

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Within the Churchill Downs segment, revenue is further disaggregated between live and simulcast racing, historical racing, racing event-related services, and other services.

• For the Online Wagering segment, revenue is disaggregated between the TwinSpires business and online sports betting and iGaming business given that TwinSpires' revenue is primarily related to online pari-mutuel wagering on live race events while online sports betting and iGaming revenue relates to casino gaming service offerings.

Online sports betting and iGaming service offerings are currently nominal.

• For the Online Wagering segment, revenue is disaggregated between the TwinSpires Horse Racing business and our TwinSpires Sports and Casino business given that TwinSpires' Horse Racing revenue is primarily related to online pari-mutuel wagering on live race events while the TwinSpires Sports and Casino revenue relates to sports and casino gaming service offerings.

Within the Online Wagering segment, revenue is further disaggregated between live and simulcast racing, gaming, and other services.

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We believe that these disclosures depict how the amount, nature, timing, and uncertainty of cash flows are affected by economic factors.

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

OTHER BALANCE SHEET ITEMS

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Total $ 167.8 $ 173.4

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES

The Company owns a 50 % interest in MVG, a 61.3 % interest in Rivers Des Plaines (as described further below), and two other immaterial joint ventures.

Investments in and advances to unconsolidated affiliates as of December 31, 2020 and 2019 primarily consisted of a 50 % interest in MVG, a 61.3 % interest in Rivers Des Plaines (as described further below), and two other immaterial joint ventures.

Miami Valley Gaming

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Since both we and DNC have participating rights over MVG, and both must consent to MVG's operating, investing and financing decisions, we account for MVG using the equity method.

Our investment in MVG was $ 110.1 million as of December 31, 2020 and $ 110.8 million as of December 31, 2019.

The Company received distributions from MVG of $ 20.0 million in 2020, $ 23.8 million in 2019 and $ 18.8 million in 2018.

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

Rivers Des Plaines

On March 5, 2019, the Company completed the Sale Transaction to acquire approximately 42 % of Midwest Gaming, the parent company of Rivers Des Plaines, for cash consideration of approximately $ 406.6 million and $ 3.5 million of certain transaction costs and working capital adjustments.

Following the closing of the Sale Transaction, the parties completed the Recapitalization pursuant to which Midwest Gaming used approximately $ 300.0 million in proceeds from amended and extended credit facilities to redeem, on a pro rata basis, additional Midwest Gaming units held by High Plaines and Casino Investors.

As a result of the Recapitalization, the Company's ownership of Midwest Gaming increased to 61.3 %.

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As a result, we account for Midwest Gaming using the equity method.

The Company’s investment in Midwest Gaming is presented at our initial cost of investment plus its accumulated proportional share of income or loss, including depreciation/accretion of the difference in the historical basis of the Company’s contribution, less any distributions it has received.

The Company’s investment in Midwest Gaming is presented at our initial cost of investment plus the Company's accumulated proportional share of income or loss, including depreciation/accretion of the difference in the historical basis of the Company’s contribution, less any distributions it has received.

Following the Sale Transaction and Recapitalization, the carrying value of the Company’s investment in Midwest Gaming was $ 835.0 million higher than the Company’s underlying equity in the net assets of Midwest Gaming.

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As of December 31, 2020, the net aggregate basis difference between the Company’s investment in Midwest Gaming and the amounts of the underlying equity in net assets was $ 833.3 million.

On August 31, 2018, the Company closed the acquisition of the remaining 50 % ownership of Ocean Downs owned by SCH in exchange for liquidating the Company's 25 % equity interest in SCH, which is the parent company of Saratoga New York and Saratoga Colorado.

Upon the closing of the Ocean Downs/Saratoga Transaction, the Company owns 100 % of Ocean Downs and has no equity interest or management involvement in Saratoga New York or Saratoga Colorado.

Prior to August 31, 2018, Ocean Downs was accounted for under the equity method.

Our investment in Rivers Des Plaines was $ 519.0 million as of December 31, 2020 and $ 522.1 million as of December 31, 2019.

The Company received distributions from Rivers Des Plaines of $ 10.7 million in 2020 and $ 14.2 million in 2019.

Ocean Downs was accounted for under the equity method prior to August 31, 2018.

On August 31, 2018, the Company completed the acquisition of the remaining 50 % ownership of Ocean Downs owned by SCH in exchange for liquidating the Company's 25 % equity interest in SCH, which is the parent company of Saratoga New York and Saratoga Colorado.

As of August 31, 2018, the Company owns 100 % of Ocean Downs and has no equity interest or management involvement in Saratoga New York or Saratoga Colorado.

Summarized Financial Results for our Unconsolidated Affiliates

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The summarized income statement information for 2020 and summarized balance sheet information as of December 31, 2020 includes the following equity investments:

MVG, Rivers Des Plaines from the transaction date of March 5, 2019, and two other immaterial joint venture.

MVG, Rivers Des Plaines, and one other immaterial joint venture.

The summarized income statement information for 2019 and summarized balance sheet information as of December 31, 2019 includes the following equity investments:

MVG, Rivers Des Plaines from the transaction date of March 5, 2019, and two other immaterial joint ventures.

The summarized income statement information for 2018 includes the following equity investments:

MVG, Saratoga New York, Saratoga Colorado, Ocean Downs, and two other immaterial joint ventures.

As noted above, on August 31, 2018, the Company completed the Ocean Downs/Saratoga Transaction.

As such, the 2018 summarized income statement information includes the results of Ocean Downs, Saratoga New York, and Saratoga Colorado through August 31, 2018.

Summarized balance sheet information as of December 31, 2018 included MVG and two other immaterial joint ventures.

The summarized income

MVG, Saratoga New York, Saratoga Colorado, Ocean Downs,

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

statement for 2017 includes the following equity investments:

MVG, Saratoga New York, Saratoga Colorado, Ocean Downs, and two other immaterial joint ventures.

and two other immaterial joint ventures.

The 2018 summarized income statement information includes the results of Ocean Downs, Saratoga New York, and Saratoga Colorado through August 31, 2018.

(in millions) 2020 2019

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Total assets $ 645.2 $ 560.2

Liabilities and Members' (Deficit) Equity

Liabilities and Members' Deficit

Current liabilities $ 133.5 $ 73.3

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Other liabilities 42.3 20.6

Members' (deficit) equity ( 278.7 ) 205.2

Total liabilities and members' (deficit) equity $ 560.2 $ 226.4

Members' deficit ( 284.1 ) ( 278.7 )

Total liabilities and members' deficit $ 645.2 $ 560.2

Years Ended December 31,

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Net income $ 54.1 $ 94.1 $ 66.8

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

Our operating leases with terms greater than one year are primarily related to buildings and land.

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The components of total lease cost were as follows:

(in millions) Twelve Months Ended December 31, 2019

(in millions) Year Ended December 31, 2020 Year Ended December 31, 2019

Short-term lease cost (a) (b)

Operating lease cost (b)

Finance lease interest expense 0.1 —

Finance lease amortization expense (b)

Total lease cost $ 13.4 $ 21.0

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(b) Includes variable lease costs, which were not material

Other information related to operating leases was as follows:

(in millions) Twelve Months Ended December 31, 2019

Supplemental Cash Flow Information

Supplemental cash flow information related to leases are as follows:

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

(in millions) Year Ended December 31, 2020 Year Ended December 31, 2019

Cash paid for amounts included in the measurement of lease liabilities

Operating cash flows from operating leases $ 6.0 $ 5.2

Operating cash flows from finance leases $ 0.1 $ —

Financing cash flows from finance lease $ 0.1 $ —

ROUAs obtained in exchange for lease obligations

Lease Term and Discount Rate December 31, 2019

Weighted average remaining lease term 6.5 years

Operating leases $ 2.8 $ 3.7

Finance leases $ 5.1 $ 1.5

Other information related to operating leases was as follows:

As of December 31,

Weighted Average Remaining Lease Term 2020 2019

Operating leases 5.9 years 6.5 years

Finance leases 18.4 years 14.9 years

Weighted Average Discount Rate

As of December 31, 2019, the future undiscounted cash flows associated with the Company's operating lease liabilities were as follows:

Operating leases 3.8 % 3.9 %

Finance leases 2.9 % 3.9 %

As of December 31, 2020, the future undiscounted cash flows associated with the Company's operating and financing lease liabilities were as follows:

(in millions)

Years Ended December 31, Totals

Years Ended December 31, Operating Leases Finance Leases

2021 $ 5.5 $ 0.4

Thereafter 5.5 6.0

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Notes to Consolidated Financial Statements

As required by ASC 842, the future minimum operating lease payments on non-cancelable leases as of December 31, 2018 under the accounting standards in effect as of that period were as follows:

Years Ended December 31,

Thereafter 11.2

DIRECTOR AND EMPLOYEE BENEFIT PLANS

Directors and Officers Retirement Plan

We provide eligible executives and directors an opportunity to defer to a future date the receipt of base and bonus compensation for services as well as director’s fees through the 2005 Deferred Compensation Plan (the "Deferred Plan").

BOARD OF DIRECTOR AND EMPLOYEE BENEFIT PLANS

Board of Directors and Officers Retirement Plan

We provide eligible executives and members of our Board of Directors an opportunity to defer to a future date the receipt of base and bonus compensation for services as well as director’s fees through the 2005 Deferred Compensation Plan (the "Deferred Plan").

Our matching contribution on base compensation deferral of executives equals the matching contribution of our profit-sharing plan with certain limits.

Our directors may elect to invest the deferred director fee compensation into our common stock within the Deferred Plan.

Members of our Board of Directors may elect to invest the deferred director fee compensation into our common stock within the Deferred Plan.

Investments in our common stock are credited as hypothetical shares of common stock based on the market price of the stock at the time the compensation was earned.

Upon the end of the director's service, common stock shares are issued to the director.

On December 13, 2019, the Compensation Committee elected to freeze the Deferred Plan with respect to employee participant deferrals after the 2019 plan year, although directors will continue to participate in the Deferred Plan.

On December 13, 2019, the Compensation Committee adopted the Churchill Downs Incorporated Restricted Stock Unit Deferral Plan (the "RSU Deferral Plan"), effective January 1, 2020.

On December 13, 2019, the Compensation Committee elected to freeze the Deferred Plan with respect to employee participant deferrals after the 2019 plan year.

Members of our Board of Directors may continue to participate in the Deferred Plan.

On December 13, 2019, the Compensation Committee adopted the Churchill Downs Incorporated Restricted Stock Unit Deferral Plan, effective January 1, 2020.

Certain individual employees who are management or highly compensated employees of the Company may elect to defer settlement of RSUs granted pursuant to the 2016 Incentive Plan.

Other Retirement Plans

We have a profit-sharing plan that covers all employees not otherwise participating in an associated profit-sharing plan, with three months or more of service.

We match contributions made by employees up to 3 % of the employee’s annual compensation and match at 50 % contributions made by the employee up to an additional 2 % of compensation with certain limits.

We have a profit-sharing plan for all employees with three months or more of service who are not otherwise participating in an associated profit-sharing plan.

We match contributions made by employees up to 3 % of the employee’s annual compensation and match at 50 % any contributions made by the employee up to an additional 2 % of compensation with certain limits.

We may also contribute a discretionary amount determined annually by the Board of Directors as well as a year-end discretionary match not to exceed 4 % of compensation.

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Cash contributions are made in accordance with negotiated labor contracts.

Retirement plan expense was $ 0.6 million in 2019, and $ 0.7 million in both 2018 and 2017.

Retirement plan expense was $ 0.3 million in 2020,$ 0.6 million in 2019, and $ 0.7 million in 2018.

Our policy is to fund this expense as accrued, and we currently estimate that future contributions to these plans will not increase significantly from prior years.

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The following methods and assumptions are used to estimate the fair value of each class of financial instruments for which it is practicable to estimate:

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

Restricted Cash

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The fair value of the Company’s 2028 Senior Notes and 2027 Senior Notes are estimated based on unadjusted quoted prices for identical or similar liabilities in markets that are not active and as such are Level 2 measurements.

The fair value of the Company's Senior Secured Term Loan B due 2024 (the "Term Loan B") approximates its gross carrying value as it is variable rate debt and as such is a Level 2 measurement.

The fair value of the Company's Senior Secured Term Loan B due 2024 (the "Term Loan B") and the Revolver approximates the gross carrying value as both are variable rate debt and as such are Level 2 measurements.

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

The carrying amounts and estimated fair values by input level of the Company's financial instruments are as follows:

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Term Loan B 384.8 388.0 — 388.0 —

Revolver 149.7 149.7 — 149.7 —

2027 Senior Notes 593.2 635.2 635.2

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2027 Senior Notes 592.0 636.0 — 636.0 —

2028 Senior Notes 493.9 515.2 — 515.2 —

CONTINGENCIES

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Legal fees are expensed as incurred.

If the loss contingency in question is not both probable and reasonably estimable, we do not establish an accrual and the matter will continue to be monitored for any developments that would make the loss contingency both probable and reasonably

In the event that a legal proceeding results in a substantial judgment against, or settlement by us, there can be no assurance that any resulting liability or financial commitment would not have a material adverse impact on our business.

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

Louisiana Environmental Protection Agency Non-Compliance Issue

On December 6, 2013, we received a notice from the United States Environmental Protection Agency ("EPA") regarding alleged CAFO non-compliance at Fair Grounds Race Course.

On October 21, 2019, we reached an agreement in principle, subject to final regulatory and court approval.

If approved, the agreement will include a $ 2.8 million penalty, which has been accrued and is included in selling, general and administrative expense in our accompanying consolidated statement of comprehensive income for the year ended December 31, 2019, and accrued expense and other current liabilities in our accompanying consolidated balance sheet at December 31, 2019.

NET INCOME PER COMMON SHARE COMPUTATIONS

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(in millions, except per share data) 2020 2019 2018

Numerator for basic net income per common share:

Numerator for basic net income (loss) per common share:

Net income from continuing operations $ 13.3 $ 139.6 $ 182.6

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Net income from continuing operations, net of loss attributable to noncontrolling interests 13.5 139.9 182.6

Net income from continuing operations allocated to participating securities — — ( 0.1 )

Net (loss) income from discontinued operations ( 95.4 ) ( 2.4 ) 170.2

Numerator for basic net income per common share $ 137.5 $ 352.8 $ 140.4

Numerator for basic net (loss) income per common share $ ( 81.9 ) $ 137.5 $ 352.8

Numerator for diluted net income from continuing operations per common share $ 13.5 $ 139.9 $ 182.6

Numerator for diluted net income per common share $ 137.5 $ 352.8 $ 140.5

Denominator for net income per common share:

Numerator for diluted net (loss) income per common share $ ( 81.9 ) $ 137.5 $ 352.8

Denominator for net (loss) income per common share:

Basic 39.6 40.1 41.3

Plus dilutive effect of stock awards 0.5 0.5 0.3

Plus dilutive effect of participating securities — — 0.2

Diluted 40.1 40.6 41.6

Net income (loss) per common share data:

Net (loss) income per common share data:

Continuing operations $ 0.34 $ 3.49 $ 4.42

Discontinued operations $ ( 2.41 ) $ ( 0.06 ) $ 4.12

Net income per common share - basic $ 3.43 $ 8.54 $ 2.97

Net (loss) income per common share - basic $ ( 2.07 ) $ 3.43 $ 8.54

Continuing operations $ 0.33 $ 3.44 $ 4.39

Discontinued operations (1)

Net income per common share - diluted $ 3.38 $ 8.48 $ 2.92

$ ( 2.41 ) $ ( 0.06 ) $ 4.09

Net (loss) income per common share - diluted $ ( 2.08 ) $ 3.38 $ 8.48

(1) Amounts exclude all potential common equivalent shares for periods when there is a net loss from discontinued operations.

SEGMENT INFORMATION

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Churchill Downs, Online Wagering and Gaming.

Refer to Note 1, Description of Business, for additional information regarding the changes we made to our segments during the first quarter of 2019.

Prior year amounts have been reclassified to conform to this presentation.

Our operating segments reflect the internal management reporting used by our chief operating decision maker to evaluate results of operations and to assess performance and allocate resources.

• Churchill Downs

The Churchill Downs segment includes live and historical pari-mutuel racing related revenue and expenses at Churchill Downs Racetrack and Derby City Gaming.

Churchill Downs Racetrack is the home of the Kentucky Derby and conducts live racing during the year.

Derby City Gaming is an HRM facility that operates under the Churchill Downs pari-mutuel racing license at the auxiliary training facility for Churchill Downs Racetrack in Louisville, Kentucky.

Churchill Downs Racetrack and Derby City Gaming earn commissions primarily from pari-mutuel wagering on live races at Churchill Downs and on historical races at Derby City Gaming, simulcast fees earned from other wagering sites, admissions, personal seat licenses, sponsorships, television rights, and other miscellaneous services (collectively "racing event-related services"), as well as food and beverage services.

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

• Online Wagering

The Online Wagering segment includes the revenue and expenses for the TwinSpires Horse Racing business and the TwinSpires Sports and Casino business.

Both businesses are headquartered in Louisville, Kentucky.

TwinSpires Horse Racing operates the online horse racing wagering business for TwinSpires.com, BetAmerica.com, and other white-label platforms;

facilitates high dollar wagering by international customers (through Velocity);

and provides the Bloodstock Research Information Services platform for horse racing statistical data.

Our TwinSpires Sports and Casino business operates our sports betting and casino iGaming platform in multiple states, including Colorado, Indiana, Michigan, Mississippi, New Jersey, and Pennsylvania.

The TwinSpires sports and casino business includes the mobile and online sports betting and casino results and the results of our three retail sportsbooks in Colorado, Indiana and Michigan which utilize a third party's casino license.

The results of the two retail sportsbooks at our Mississippi properties, our retail sportsbook at Presque Isle in Pennsylvania and the retail and online BetRivers sportsbook in Illinois provided by Rivers Des Plaines and managed by Rush Street Interactive, are included in the Gaming segment.

The Gaming segment includes revenue and expenses for the casino properties and associated racetrack or jai alai facilities which support the casino license as applicable.

The Gaming segment has approximately 11,000 slot machines and video lottery terminals ("VLTs") and 200 table games located in eight states.

The Gaming segment revenue and expenses includes the following properties:

◦ Calder Casino and Racing ("Calder")

◦ Fair Grounds Slots, Fair Grounds Race Course, and Video Services, LLC ("VSI") (collectively, "Fair Grounds and VSI")

◦ Harlow’s Casino Resort and Spa ("Harlow's")

◦ Lady Luck Casino Nemacolin management agreement

◦ Ocean Downs Casino and Racetrack ("Ocean Downs")

◦ Oxford Casino and Hotel ("Oxford")

◦ Presque Isle

◦ Riverwalk Casino Hotel ("Riverwalk")

The Gaming segment also includes net income for our ownership portion of the Company’s equity investments in the following:

◦ 61.3 % equity investment in Midwest Gaming, the parent company of Rivers Des Plaines in Des Plaines, Illinois

◦ 50 % equity investment in MVG

We have aggregated the following businesses as well as certain corporate operations, and other immaterial joint ventures in "All Other" to reconcile to consolidated results:

• Turfway Park

• Arlington International Racecourse ("Arlington")

• United Tote

Eliminations include the elimination of intersegment transactions.

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Adjusted EBITDA includes the following adjustments:

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

Adjusted EBITDA includes our portion of EBITDA from our equity investments.

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Our calculation of Adjusted EBITDA may be different from the calculation used by other companies and, therefore, comparability may be limited.

For segment reporting, Adjusted EBITDA includes intercompany revenue and expense totals that are eliminated in the accompanying consolidated statements of comprehensive income.

Effective January 1, 2019, the Company does not allocate corporate and other related expenses to our segments in the accompanying consolidated statements of comprehensive income.

The prior year amounts in the accompanying consolidated statements of comprehensive income were reclassified to conform to this presentation.

For segment reporting, Adjusted EBITDA includes intercompany revenue and expense totals that are eliminated in the accompanying consolidated statements of comprehensive (loss) income.

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

The tables below present net revenue from external customers and intercompany revenue from each of our segments, Adjusted EBITDA by segment and reconciles comprehensive income to Adjusted EBITDA:

The tables below present net revenue from external customers and intercompany revenue from each of our segments, Adjusted EBITDA by segment and reconciles comprehensive (loss) income to Adjusted EBITDA:

Years Ended December 31,

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Online Wagering:

TwinSpires 289.9 290.2 255.6

Online Sports Betting and iGaming 0.6 — —

TwinSpires Horse Racing 403.4 289.9 290.2

TwinSpires Sports and Casino 4.9 0.6 —

Total Online Wagering 408.3 290.5 290.2

Presque Isle 138.5 — —

Fair Grounds and VSI 97.6 123.0 117.7

Oxford Casino 101.7 102.0 90.8

Calder 99.8 98.6 87.9

Presque Isle 75.2 138.5 —

Ocean Downs 60.3 85.9 25.9

Calder 51.8 99.8 98.6

Oxford Casino 44.9 101.7 102.0

Riverwalk Casino 49.1 58.9 54.5

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Fair Grounds and VSI 2.2 1.8 1.6

Calder 0.1 0.1 —

Presque Isle 0.2 0.5 —

Calder 0.1 0.1 0.1

Total Gaming 2.5 2.4 1.7

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Historical racing (a)

13.8 — — 13.8 — 13.8

Racing event-related services 115.2 — 3.9 119.1 5.8 124.9

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(in millions) 2020 2019 2018

Reconciliation of Comprehensive Income to Adjusted EBITDA:

Comprehensive income attributable to CDI $ 137.5 $ 353.2 $ 140.4

Reconciliation of Comprehensive (Loss) Income to Adjusted EBITDA:

Comprehensive (loss) income attributable to Churchill Downs Incorporated $ ( 81.9 ) $ 137.5 $ 353.2

Foreign currency translation, net of tax — — ( 0.6 )

Change in pension benefits, net of tax — — 0.2

Net income attributable to CDI 137.5 352.8 140.5

Net (loss) income attributable to Churchill Downs Incorporated ( 81.9 ) 137.5 352.8

Net loss attributable to noncontrolling interest 0.2 0.3 —

Net income before noncontrolling interest 137.2 352.8 140.5

Net (loss) income before noncontrolling interest ( 82.1 ) 137.2 352.8

Loss (income) from discontinued operations, net of tax 95.4 2.4 ( 170.2 )

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Interest expense 80.0 70.9 40.1

Loss on extinguishment of debt — — 20.7

Income tax provision (benefit) 56.8 51.3 ( 19.9 )

Income tax (benefit) provision ( 5.3 ) 56.8 51.3

EBITDA $ 180.9 $ 363.7 $ 337.6

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We believe that each such transaction has been on terms no less favorable for us than could have been obtained in a transaction with a third party, and no officer or director received any extra or special benefit in connection with such transactions.

On June 9, 2017, we entered into an agreement with a related party, TDG, to repurchase 3,000,000 shares of the Company's common stock for $ 52.93 per share in a privately negotiated transaction.

The aggregate purchase price was $ 158.8 million.

Refer to Note 9, Shareholders' Equity, for additional information related to the repurchases.

Refer to Note 23, Subsequent Events, for information regarding a related party transaction.

Churchill Downs Incorporated

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SUBSEQUENT EVENTS

As of the date of this filing, there were no subsequent events.

Stock Repurchase Agreement

On February 1, 2021, the Company entered into an agreement (the “Stock Repurchase Agreement”) with an affiliate of The Duchossois Group, Inc.

(“TDG”) to repurchase 1,000,000 shares of the Company’s common stock for $ 193.94 per share in a privately negotiated transaction.

The aggregate purchase price was $ 193.9 million.

The Stock Repurchase Agreement contains customary representations, warranties and covenants of the parties.

The repurchase of shares of common stock from TDG pursuant to the Stock Repurchase Agreement was approved by the Company's Board of Directors separately from, and will not reduce the authorized amount remaining under, the existing common stock repurchase program from October 2018.

The Company repurchased the shares using available cash and borrowings under the Revolver.

Amendment to Credit Agreement

Also, on February 1, 2021, the Company entered into an amendment (the “Third Amendment”) to the Credit Agreement.

The Third Amendment increased the amount of certain otherwise restricted payments permitted during the Financial Covenant Relief Period from $ 26.0 million to $ 226.0 million to accommodate the repurchase of shares of common stock from TDG described above.

Arlington Park

On February 23, 2021, the Company launched a process to sell the 326 acres at Arlington Park.

QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

(in millions, except per common share data) Year Ended December 31, 2020

First Quarter (a)

First Quarter

Second Quarter Third Quarter

Fourth Quarter (b)

Fourth Quarter

Net revenues $ 252.9 $ 185.1 $ 337.8 $ 278.2

Operating income 28.0 156.4 27.8 3.5

Income from continuing operations, net of tax 11.9 108.3 15.2 4.2

Income (loss) from discontinued operations, net of tax ( 0.3 ) ( 1.2 ) ( 0.4 ) ( 0.5 )

Net income (loss) per common share - basic (e) :

Operating (loss) income ( 11.6 ) ( 0.4 ) 49.5 22.7

(Loss) income from continuing operations, net of tax ( 22.6 ) ( 23.6 ) 43.1 16.4

(Loss) income from discontinued operations, net of tax ( 0.9 ) ( 95.2 ) — 0.7

Net (loss) income per common share - basic (c) :

Continuing operations $ ( 0.57 ) $ ( 0.59 ) $ 1.09 $ 0.41

Discontinued operations $ ( 0.02 ) $ ( 2.41 ) $ — $ 0.02

Net income per common share - basic $ 0.29 $ 2.67 $ 0.37 $ 0.10

Net income (loss) per common share - diluted (e) :

Net (loss) income per common share - basic $ ( 0.59 ) $ ( 3.00 ) $ 1.09 $ 0.43

Net (loss) income per common share - diluted (c) :

Continuing operations $ ( 0.57 ) $ ( 0.59 ) $ 1.08 $ 0.41

Discontinued operations $ ( 0.02 ) $ ( 2.41 ) $ — $ 0.02

Net income per common share - diluted $ 0.29 $ 2.63 $ 0.36 $ 0.10

Net (loss) income per common share - diluted $ ( 0.59 ) $ ( 3.00 ) $ 1.08 $ 0.43

Churchill Downs Incorporated

Notes to Consolidated Financial Statements

(in millions, except per common share data) Year Ended December 31, 2019

First Quarter (c)

Second Quarter Third Quarter (d)

Fourth Quarter

First Quarter (a)

Second Quarter Third Quarter

Fourth Quarter (b)

Net revenues $ 265.4 $ 477.4 $ 306.3 $ 280.6

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Income (loss) from discontinued operations, net of tax ( 0.3 ) ( 1.2 ) ( 0.4 ) ( 0.5 )

Net income (loss) per common share - basic (e) :

Net income (loss) per common share - basic (c) :

Continuing operations $ 0.30 $ 2.70 $ 0.38 $ 0.11

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Net income per common share - basic $ 0.29 $ 2.67 $ 0.37 $ 0.10

Net income (loss) per common share - diluted (e) :

Net income (loss) per common share - diluted (c) :

Continuing operations $ 0.30 $ 2.66 $ 0.37 $ 0.11

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Net income per common share - diluted $ 0.29 $ 2.63 $ 0.36 $ 0.10

(a) First quarter of 2019 includes the acquisitions of Presque Isle and Lady Luck Nemacolin, and equity investment in Midwest Gaming.

(a) First quarter of 2019 includes the acquisitions of Presque Isle and Lady Luck Nemacolin, and the equity investment in Midwest Gaming.

(b) Fourth quarter of 2019 includes the acquisition of Turfway Park and $ 10.0 million accelerated amortization of the purchase and sale rights related to the Turfway Park Acquisition.

(c) First quarter of 2018 includes a $ 219.5 million gain on the Big Fish Games Transaction, which is included as a discontinued operation.

(d) Third quarter of 2018 includes a $ 54.9 million gain on the Ocean Downs/Saratoga Transaction.

(e) Net income per common share calculations for each quarter are based on the weighted average number of shares outstanding during the respective period.

(c) Net (loss) income per common share calculations for each quarter are based on the weighted average number of shares outstanding during the respective period.

The sum of the quarters may not equal the full-year income (loss) per share.

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Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Churchill Downs Incorporated and its subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2019 listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”).

We have audited the accompanying consolidated balance sheets of Churchill Downs Incorporated and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of comprehensive (loss) income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2020 listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”).

We also have audited the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

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We believe that our audits provide a reasonable basis for our opinions.

As described in Management’s Report on Internal Control over Financial Reporting, management has excluded Presque Isle Downs and Casino (“Presque Isle”) and Turfway Park from its assessment of internal control over financial reporting as of December 31, 2019 because they were acquired by the Company in purchase business combinations during 2019.

We have also excluded Presque Isle and Turfway Park from our audit of internal control over financial reporting.

Presque Isle and Turfway Park are wholly-owned subsidiaries whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting collectively represent 9.3% and 10.7%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2019.

Definition and Limitations of Internal Control over Financial Reporting

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The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Valuation of the Presque Isle Indefinite-Lived Gaming Rights Intangible Asset

As described in Notes 1 and 3 to the consolidated financial statements, in 2019 the Company completed the acquisition of Presque Isle for cash consideration of $178.9 million, which resulted in a $56.0 million indefinite-lived gaming rights intangible asset being recorded.

The fair value of the gaming rights intangible asset was determined by management using the Greenfield Method, which is an income approach methodology that calculates the present value of the overall business enterprise based on a projected cash flow stream.

The primary inputs used by management in the estimation of the fair value of the gaming rights intangible asset included estimated future revenue and operating expenses, start-up costs, and discount rate.

The principal considerations for our determination that performing procedures relating to the valuation of the Presque Isle indefinite-lived gaming rights intangible asset is a critical audit matter are (i) there was a high degree of auditor judgment and subjectivity in applying procedures relating to the fair value measurement of the gaming rights intangible asset acquired due to the significant amount of judgment by management when developing the fair value estimate, (ii) significant audit effort was required in evaluating the estimated future revenue, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.

Impairment Assessment for the Presque Isle Indefinite-Lived Gaming Rights Intangible Asset

As described in Notes 2, 7, and 8 to the consolidated financial statements, the Company’s indefinite-lived gaming rights intangible assets balance was $288.2 million as of December 31, 2020, of which $62.6 million relates to the Presque Isle indefinite-lived gaming rights intangible asset.

Management performs an annual review for impairment as of April 1 of each fiscal year for its indefinite-lived intangible assets, or more frequently if events or circumstances indicate that it is more likely than not the relevant asset may be impaired.

During the quarter ended March 31, 2020, management concluded it was more likely than not that the Presque Isle gaming rights intangible asset may be impaired due to the impact and uncertainty of the COVID-19 pandemic.

Management performed an impairment assessment and recognized an impairment of $15.0 million for the Presque Isle indefinite-lived gaming rights intangible asset.

The fair value of the Presque Isle indefinite-lived gaming rights intangible asset was determined by management using the Greenfield Method, which is an income approach methodology that calculates the present value based on a projected cash flow stream.

The primary inputs used by management in the estimation of the fair value of the Presque Isle indefinite-lived gaming rights intangible asset included estimated future revenue, operating expenses, start-up costs, and discount rate.

The principal considerations for our determination that performing procedures relating to the impairment assessment for the Presque Isle indefinite-lived gaming rights intangible asset is a critical audit matter are (i) the high degree of auditor judgment and subjectivity in performing procedures relating to the fair value measurement of the gaming rights indefinite-lived intangible asset due to the significant judgment by management when developing the fair value estimate;

(ii) significant audit effort in evaluating the significant assumptions related to estimated future revenue, operating expenses, start-up costs, and discount rate;

and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included testing the effectiveness of controls relating to the acquisition accounting, including controls over management’s valuation of the gaming rights intangible asset and controls over the development of the estimated future revenue assumption.

These procedures also included, among others, reading the purchase agreement, testing management’s process for estimating the fair value of the gaming rights intangible asset, and testing management’s projected cash flows used to estimate the fair value of the gaming rights intangible asset.

Testing management’s process included evaluating the appropriateness of the Greenfield Method and the reasonableness of the estimated future revenue significant assumption.

Evaluating the reasonableness of the estimated future revenue involved considering the past performance of Presque Isle, as well as economic and industry forecasts.

Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company's Greenfield Method.

These procedures included testing the effectiveness of controls relating to the intangible asset impairment assessment, including controls over management’s valuation of the Presque Isle indefinite-lived gaming rights intangible asset.

These procedures also included, among others, testing management’s process for developing the fair value of the Presque Isle indefinite-lived gaming rights intangible asset;

evaluating the appropriateness of the Greenfield Method;

testing the completeness and accuracy of underlying data used in the Greenfield Method;

and evaluating the reasonableness of significant assumptions used by management related to estimated future revenue, operating expenses, start-up costs, and discount rate.

Evaluating management’s assumptions related to estimated future revenue, operating expenses, and start-up costs involved evaluating whether the assumptions used were reasonable considering the current and past performance of Presque Isle and relevant third-party economic and industry data.

Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of the Greenfield Method and evaluating the reasonableness of the discount rate assumption.

/s/ PricewaterhouseCoopers LLP

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What changed 10-K

Item 8. Financial Statements and Supplementary Data